Deferred pensioners are entitled to have their deferred pensions revalued annually during the period between the date they leave service and the date they reach retirement under the Pension Schemes Act 1993. Revaluation is designed to ensure that the level of deferred pension is inflation-proofed and does not lose its value over the period up to retirement. The most common method of revaluation is limited price indexation, whereby the member's deferred pension is increased by the lesser of 5% or the RPI increase in the previous year.

The High Court in Davidson v Arla UK plc considered the application of the statutory provisions in circumstances where an ex employee signed a compromise agreement that stipulated an exact amount of pension payable at a future retirement date based on an increased notional salary at that future date. 

The High Court held that the terms of the compromise agreement meant that Mr Davidson had forfeited his statutory right to have his deferred pension revalued between the date he left employment and the date he reached the age of 60. In exchange for giving up the right to revaluation, the former employee had received the promise of a fixed pension payable when he reached the age of 60, based on an inflated notional salary at that date.

It is not generally thought possible to contract out of the Pension Schemes Act 1993 provisions but this case highlights the complexity of the statutory provisions and the fact that technical points can have a huge bearing on the level of pension ultimately payable to a former employee. The parties to compromise agreements need to understand precisely what they are agreeing to in relation to pension entitlements.

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