The Government is consulting on proposals which would clarify how occupational pension schemes will be affected by the decision last year to use the consumer prices index (CPI), instead of the retail prices index (RPI), as the measure of inflation used to determine minimum increases to deferred pensions and pensions in payment.
The change will directly affect revaluation and pension increases in a scheme whose rules provide only for whatever increases legislation requires. However, some schemes’ rules expressly say that deferred pensions or pensions in payment must be increased by reference to the RPI. Exactly how the changes will affect those schemes has remained unclear and is the subject of the consultation.
The consultation closes on 2 March 2011. The Pensions Bill 2011 is to make the necessary amendments to the revaluation and indexation legislation.
The consultation suggests that the Government will be giving pension schemes less flexibility to make changes than many people had expected.
The key points in the consultation are:
- The Government does not intend to pass legislation that would directly override scheme rules which promise increases based on the RPI, so that references to the RPI are automatically replaced with references to the CPI.
- Nor does it intend to give trustees or employers any new powers to change their schemes’ rules so as to replace references to the RPI with references to the CPI, at least for benefits which have already built up.
- Where a scheme’s rules about increases to pensions in payment already at least match the old statutory minimum (annual increases reflecting RPI inflation capped at 5% for pensions earned between April 1997 and April 1995, and reflecting RPI inflation capped at 2.5% for pensions earned after April 2005), they will not have to pay increases based on the CPI where that would be higher. In other words, schemes in that position will not have to apply a CPI underpin.
- However, it seems that a CPI underpin will apply where scheme rules about deferred pensions expressly require revaluation by reference to the RPI. Schemes will have to uplift deferred pensions by the better of statutory revaluation (based on RPI inflation before 2010 and CPI inflation from then onwards) and whatever their own rules may require.
- The Government intends to amend the consultation rules, so that employers will have to consult employees before their scheme rules are changed to adopt the CPI as the measure of inflation going forwards.
- The Government does not intend to make any overriding amendments to existing annuity contracts, buy-in or buy-out policies where these refer to RPI increases.