Following the recent government announcements that the Consumer Price Index (CPI) will be replacing RPI as the basis for calculating inflation linked statutory revaluation and pension increases for all occupational pensions and for PPF and FAS compensation, the DWP has issued a consultation on draft regulations aimed at bringing this change into effect in relation to the PPF and FAS. Consultation closes on 3 November 2010.

Unfortunately, the draft regulations do not clarify any of the grey areas we identified in our July briefing CPI change: is it retrospective?

The draft regulations are intended to make the following changes:

  • accrued pensions are to be revalued by reference to RPI for periods before 31 March 2011 and by reference to CPI after that, under both PPF and FAS rules;
  • from April 2011, increases to the FAS cap will be made by reference to CPI;
  • FAS indexation will be measured against CPI from 1 January 2012.

The corresponding change to PPF indexation (also from 1 January 2012) has to be made by an amendment to primary legislation. This is intended to be done in a Pensions and Savings Bill to be introduced in the autumn.

The draft Regulations do not refer specifically to CPI but to “the general level of prices in Great Britain estimated in such manner as the Secretary of State thinks fit, as published by the Secretary of State from time to time”. This approach is intended to allow flexibility, should it be needed later.

Changes are proposed to the provisions relating to section 143 valuations, used to determine whether the PPF will assume responsibility for a pension scheme by identifying whether it is able to secure benefits above PPF compensation levels. Where a scheme enters a PPF assessment period before the change to CPI, but its valuation is not carried out until after that date, the actuary will be able to undertake a valuation on the CPI basis if he considers it likely that the scheme will be able to buy out the CPI liabilities. This issue will be kept under review.

The draft Pension Protection Fund (Pension Compensation Sharing on Divorce etc.) Regulations 2010, intended to allow for the sharing of PPF compensation, are also to be amended to reflect the change to CPI.