It is now a year since the Government announced its intention to change the minimum basis for uprating pensions, under private sector occupational pension schemes, from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). Following last month’s DWP response to consultation, we have a much better picture of the impact of the change.
What do we know ?
The laying of the latest Revaluation Order, effective 1 January 2011, established CPI as the relevant index for the 2011 revaluation of accrued pension benefits. As the pension increase legislation cross-refers to this Order, the effect of the change is that statutory minimum increases going forward will be based on CPI too.
The significance of the DWP response to consultation was that it confirmed:
- the Government will not introduce legislation that would directly override the rules of schemes to provide for CPI as the basis for revaluation and indexation of members’ benefits;
- the Government will not introduce a modification power (beyond schemes’ existing amendment powers) to allow schemes to use CPI;
- the Government will not require a CPI underpin for those schemes that do retain RPI for the indexation of pension increases.
The result is that, where schemes take no action, rules based on statutory minima will reflect the CPI measure, and schemes with rules that “hard code” RPI will continue to base uprating on RPI.
Those complications that remain tend to arise from the fact that the position may vary between different groups of members. Members who left a scheme would usually have their benefits governed by the rules which then applied, which may deal with increases in a different way to the current rules. There is a real risk, particularly on past rewrites, that inadvertent changes to revaluation or pensions increase rules may have been made (raising questions now, many years later, over restrictions in scheme amendment powers, or statutory restrictions on modification). If the position is not investigated, then current decisions by trustees and employers as to what to do going forward - and of the quantum of potential cost savings - may not be based on complete information.
What are we still waiting for ?
A few pieces of the jigsaw remain. The Pensions Bill now going through Parliament will make further changes associated with moving to CPI. In particular, it will deal with the Government’s commitment that schemes paying RPI-related pensions increases will not have to separately calculate CPI-related increases each year and then award the higher of the two. In addition, since the response to consultation, an equivalent change has been drafted into the Bill for schemes with “hard coded” RPI revaluation prior to retirement. The Bill is expected to receive Royal Assent in the autumn.
The Government is yet to finalise its proposed amendments to the Consultation Regulations. These will require statutory consultation on changes to scheme rules that switch from RPI to CPI.
Finally, the Regulator indicated last July that it would be issuing expanded guidance for schemes on the implications of the move to CPI once all the changes were finalised. This, too, is still awaited.
What should we do now ?
Despite the outstanding points, the Government has now confirmed its general policy in this area and most schemes are already actively involved in implementing the change, considering its impact and communicating with members.
Those trustees and employers who have not already done so should give serious thought to reviewing all historic scheme rules references to revaluation and pensions increases (this could mean going as far back as 1978, when GMP revaluation was introduced) to determine whether RPI increases continue to be required under scheme rules. If you would like us to assist with collating information and performing such a review, please let us know.