However, having led the pensions industry up the garden path, the Government also announced it does not propose to impose overriding legislation nor does it propose to introduce a modification power to allow schemes to use the CPI as the basis for revaluation and indexation of members’ benefits where the rules refer explicitly to the RPI.
Nevertheless, the Government does propose to legislate to prevent schemes that retain RPI indexation from having to apply the CPI as an annual underpin.
Background
In a written ministerial statement given on 8 July 2010, Steve Webb, the Pensions Minister, indicated that the DWP intended to use the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI) in future as the basis for statutory orders that affect limited price indexation (LPI), statutory revaluations in deferment and increases to post-88 guaranteed minimum pensions (GMPs). This extended the use of the CPI to private sector pensions, following the announcement made in the Emergency Budget on 22 June 2010 that the CPI was to be the basis for future increases to public sector pensions.
The statement included the line “Using CPI will mean making some small changes to primary legislation to ensure we can apply it fully in every circumstance”. This had generally been interpreted as meaning the Government was going to put overriding legislation in place to enable schemes to use the CPI in future even where their rules explicitly refer to the RPI. Draft legislation was expected to be put before Parliament at the earliest opportunity.
The DWP issued a follow-up statement on 12 July 2010 to clarify how the transition from the RPI to the CPI would work. The CPI would only be used to measure inflation over years ending on and after 30 September 2010; the RPI would still be used for all past measures of inflation. For example, the revaluations applicable to an existing deferred pensioner would be based on a combination of the RPI up to 30 September 2009 and CPI from 1 October 2009.
Draft regulations providing some form of statutory override to permit references to the RPI to be replaced by references to the CPI in schemes’ rules without contravening section 67 of the Pensions Act 1995 had been expected.
Government’s proposals
The Government now reaffirms its intention to make CPI its basis for statutory minimum revaluation and indexation requirements. This does not require any change in legislation because the Secretary of State for Work and Pensions has discretion to determine how price inflation is measured for the purpose of laying annual revaluation orders. Indeed, this year’s order, for use from 1 January 2011, has been based on the increase in the CPI over the year to September 2010.
However, today’s consultation suggests the Government has decided it would not be appropriate to override schemes’ rules to require the use of CPI indexation for scheme benefits where these refer explicitly to the RPI.
The consultation also recognises it would be very difficult for trustees to justify that making a voluntary switch to CPI indexation would be in members’ best interests, even if they were given the ability to do so. Moreover, it would upset the balance of powers between trustees and employers if employers were given the ability to make a unilateral decision to make the switch.
The Government does recognise, though, that some action will be required in order to prevent those schemes that retain RPI indexation from having the administrative burden and potential extra cost of having to apply the CPI as an underpin. In other words, a commitment to RPI indexation will provide exemption from CPI indexation.
The Government has also drafted an amendment to the Occupational and Personal Pension Schemes (Consultation by Employers and Miscellaneous Amendment) Regulations 2006 to add changes to the way pensions in payment are increased and deferred pensions are revalued as a “listed change”, ie one requiring the employer to consult affected members about before a change is made to future benefit accrual.
Comments
Whether it is CPI or RPI that will drive revaluations and/or pension increases in any particular scheme will depend on the precise wording of the scheme’s rules and arguably any booklets and announcements given to members.
Even where schemes are “stuck” with RPI indexation for benefits in excess of GMPs, it is possible CPI indexation will apply by default to post-88 GMPs. This can only add to the complexities of administration and member communication.
The Government seems to have back-tracked on its initial bravado. It will be frustrating for employers who would have liked to “downgrade” from RPI to CPI indexation not to be able to do so. However, there will be many trustees giving a huge sigh of relief that they are not required to address what would have been a very difficult decision with employer pressure and/or concerns over the employer’s covenant conflicting with the trustees’ desire to maintain benefit levels.
