RPI, CPI and pensions: Government responds
17 June 2011
The government has confirmed that it is not going to legislate to help pension schemes switch to CPI for indexation.
It is going ahead with its original plans to replace RPI with only limited changes.
The one new proposal is a measure to prevent CPI operating as an underpin on revaluation in schemes that are hard-wired to RPI.
The government's response to the public consultation sets out its final plans:
- the switch to CPI as the statutory measure for indexation is going ahead,
- there will be no statutory override imposing CPI on schemes and no exception to s.67 (no change from the original porposal),
- there will be no free-standing new power for schemes to modify their rules to adopt CPI (no change),
- scheme rule amendments making the switch for future service will be subject to 60 days' consultation by the employer (no change) and
- where CPI could act as an underpin in a scheme with RPI expressly written into its rules:
- revaluation: the government will introduce a measure to remove underpinning (this is a change)
- increases: it will remove underpinning in a wider range of circumstances than originally proposed (e.g. on recent bulk transfers) (a minor change).
The announcement today relates to private sector occupational pension schemes and follows the public consultation that closed in March.
There is little surprise in the outcome. From the outset the government had no appetite for helping schemes with the change.
As widely anticipated, a scheme's own rules will largely dictate how far it can, or has to, adopt CPI.
Where the rules say "revaluation / indexation will track statutory requirements", CPI will apply automatically. But in schemes that refer expressly to RPI, the question will be how far the rules can be amended. On the whole we expect it will be unusual for hard-wired schemes to be able to make a rule change in relation to past service benefits.
Schemes with questions over the meaning of their rules include those that say "revaluation / indexation will track the Index" and define "the Index" as "RPI or another index chosen by the Trustees" (or similar). Whether or not this flexibility can be used to change the index for accrued benefits without offending the legislation that protects them depends on its wording. The question is whether the power stands as part of the definition of the substantive benefit or as a facility to alter the substantive benefit.
And then there is the past to consider. As schemes have been amended and re-documented over time, different groups of members may have left with different entitlements over revaluation and increases. Non-standard entitlements may also have arisen as a result of bulk transfers into the scheme.
Clearly, CPI is going to apply much less widely than if the government had imposed it with an override or created a statutory power of amendment for schemes to introduce it.
If you would like more information, please contact the person you normally deal with in our pensions team or email Richard Knight.