CR211 Annuities – Complainants alleging that pension increases were inadequate.


Annuities – Complainants alleging that pension increases were inadequate.


The complainants were pensioners who had formerly belonged to an employer pension fund. The fund outsourced its pension liabilities in 1997 by purchasing individual annuities from an insurer for its pensioners, with their agreement. The purchase rate applicable was 5%, a relatively high rate (from a choice of 1% to 6%), providing for a higher initial pension than would have been the case if a lower purchase rate had been selected. [The purchase rate is the percentage of your capital paid as your initial pension.]

Over the past four years the pension increases had been as follows:
2002 4.5%
2003 0.0%
2004 1.5%
2005 3.0%

The complainants believed that these increases were inadequate, and did not do justice to a provision in the annuity policy which states:

“The bonus rate will be determined by [the insurer] taking into account the investment performance of the assets in the bonus pensions portfolio, the need for investment reserves, as well as inflation and the reasonable benefit expectations of all those who receive bonus pensions.”

The insurer advised the complainants that performance had been unsatisfactory over the period in question, but the complainants were of the view that the increases did not take inflation into account and did not meet their reasonable expectations, and that the insurer should accept responsibility for investment decisions taken.

The insurer pointed out another provision in the annuity policy:

“Your pension increases will depend on the difference between the bonus rate declared by [the insurer] and the purchase rate of 5%.”

Thus the pensions were increased annually to the extent that the bonus rate declared by the insurer exceeded the purchase rate. Pension increases would therefore be lower for a purchase rate of 5% than they would be if a lower purchase rate had been selected. In other words lower initial pensions could expect a higher increase from investment returns than higher initial pensions.


In evaluating this complaint we noted that it was clear that the insurer must also take further factors, in addition to the purchase rate, into account when determining the bonus rate each year. These are the investment performance of assets, the need for investment reserves, inflation and reasonable benefit expectations of those receiving pensions.

A consideration of the need for investment reserves would entail a consideration of the financial position of the bonus pensions portfolio, which was affected by past investment returns, the mortality experience of pensioners, and the cost of guarantees. While the recent performance of the portfolio had not been good, especially over the market downturn in 2002, there were no grounds for an inference that the insurer had been negligent in the management of the investments, and as no guarantee on pension increases was provided, there was no sense in which the insurer “must accept responsibility for investment decisions taken”. Nor was the insurer required to ensure that increases awarded were in line with inflation. Inflation was simply one of the factors which it must take into account when determining the bonus rate. The insurer must take all the factors mentioned into account and attempt to balance them, and it cannot give undue priority to any one or more factors.

The insurer had provided a table of increases since 1997:

Year Bonus rate Increase Rate of inflation
1997 17.60% 12.0% 9.3%
1998 14.50% 9.0% 6.2%
1999 6.50% 1.4% 9.0%
2000 13.00% 7.6% 2.2%
2001 10.25% 5.0% 7.0%
2002 9.75% 4.5% 4.6%
2003 5.00% 0.0% 12.4%
2004 6.60% 1.5% 0.3%
2005 8.20% 3.0% 3.4%
2006 8.20% 3.0% 3.6%

We noted that the pension increases granted by this particular insurer compared well with increases granted on comparable products provided by other insurers.


We advised the complainants that the insurer’s exercise of its discretion in determining the bonus rate had in our view not been improper or unreasonabe.

May 2007