The Department for Work and Pensions has published a response to its December 2010 consultation paper on the impact on private sector occupational pension schemes of using the Consumer Price Index (CPI) instead of the Retail Price Index (RPI) as the measure of price increases (see previous bulletin).

The key points are as follows:

  • Consultation requirements – draft regulations will be introduced which modify the regulations requiring employers to consult with members before making pension changes. Changes to the scheme’s rules on indexation and revaluation would fall under the category of ‘listed changes’, which would require the employers to consult with ‘affected members’ about the changes, where such changes ‘would be less generous’ to members.
  • Statutory override and modification power – despite many requests to do so, the response document has confirmed that there will be no statutory override or modification powers that would allow employers to impose CPI-linked indexation or revaluation where scheme rules do not permit this change. Further, it will not introduce a modification power under section 68 of the Pensions Act 1995, to overcome the obstacle to restriction of rule amendments posed by section 67 of the 1995 Act. 
  • No CPI underpin – the Pensions Bill 2011 will introduce a provision that prevents schemes that apply RPI increases having to apply a CPI underpin for pension increases in periods during which the CPI exceeds the RPI. In addition to the above anticipated provision, the DWP is also considering a corresponding provision that would extend to the revaluation of deferred pensions.

The response largely reaffirms the government’s initial intentions, with the most significant development being the extension of the underpinning rules. Employers are reminded that any switch to CPI-related indexation would depend on the terms of its governing rules. With the change remaining untested, the overall consensus is that the impact of the switch remains a legal lottery.

Please click on the following link to view the response document online.