PENSIONS PROGRESS Living with inflation
More on RPI to CPI and private sector schemes
- CPI now being used for statutory deferred pension revaluation and increases on pensions in payment
- no statutory override or modification power to help schemes which refer to RPI
- rule amendment for future service will be a listed change, requiring consultation
possibility of minor amendments in Pensions Bill 2011.
In December 2010, the government consulted on the impact of using the Consumer Prices Index (CPI), rather than the Retail Prices Index (RPI), as the statutory rate for increasing pensions in payment and revaluing deferred pensions in private sector occupational pension schemes. Since the beginning of this year, CPI has been the measure of price increases used for statutory revaluation and pension increases, but this has created uncertainty for schemes which describe their increases as relating to RPI.
In June 2011 the government issued its consultation response, confirming that it is going ahead with its original proposals, and raising the possibility of making some minor adjustments to the Pensions Bill 2011. The government is not going to legislate to help pension schemes switch to using CPI.
In the June 2010 Budget, the government announced that it would base future price inflation for state pensions, public service pensions, benefits and tax credits on CPI rather than RPI. The following month the Pensions Minister, Steve Webb, announced that the government would also be switching from RPI to CPI as the measure for statutory revaluation and indexation of benefits under private sector occupational schemes. This was followed by a statement from the Department for Work and Pensions to clarify some aspects. In December 2010, the government released a consultation on the impact of this requirement (which closed in March 2011) and draft legislation was included in the January 2011 Pensions Bill.
No overriding scheme rules
The government had previously suggested that it might introduce legislation that would override scheme rules, or introduce a modification power that would make it easier for schemes to adopt CPI as the inflation index. However, it has now confirmed that it will not help schemes in this way, even though it recognises that s67 of the Pensions Act 1995 prevents schemes amending their rules to apply CPI in relation to past service.
The government does not even propose any modification power for those schemes that have expressly written RPI increases into their rules with the intention of matching statutory minimum increases, since it would not be easy to prove that this was their intention.
Where rules can be changed for future service, the introduction of CPI-linking will be a listed change under the employer consultation requirements, which will therefore require 60 days’ consultation with affected members before a change in rules can be made. The government is still considering precisely how the legislation will be worded to implement this.
A small proportion of schemes use their own wording to set out the required increases to guaranteed minimum pensions earned post-1988. The government will not make special provisions for these. This means that if either RPI or CPI increases are below 3% in a year, there could effectively be an underpin requiring increases to be the better of RPI and CPI (subject to the 3% maximum).
Pensions Bill changes
The Pensions Bill contains provisions so that any scheme choosing to retain pension increases which are linked to RPI would not be required to use the higher of CPI or RPI in any given year. To help business mergers and acquisitions, the government will look at the possibility of extending this to schemes set up from 2011 (in some circumstances). The government has also amended the Pensions Bill to avoid an underpin in deferment for those schemes which base revaluation of deferred pensions on RPI, so that schemes will not need to pay the higher of CPI and RPI (subject to the relevant cap). One in four defined benefit schemes could otherwise have been required to provide this underpin.
Due to the fragmented way in which the changes have been announced, schemes would be forgiven for losing track. However, many trustees should now be able to implement changes. The impact on schemes depends upon how their own rules define pension increases and revaluation. As there will be no statutory override, the approach taken will largely depend upon how scheme rules are drafted and their amendment powers.