The indexation rate used to calculate pension increases continues to be a contentious area, evidenced by a number of disputes between defined benefit (“DB“) pension scheme members and their schemes’ trustees.
We have previously blogged about this subject, view our blog here.
Changes to indexation – what’s the issue?
Preserved pension benefits held by deferred members of DB schemes who left pensionable service on or after 1 January 1991 must be revalued to offset the effects of inflation between the date the member leaves service and the date they draw their pension. This is known as revaluation.
Since 6 April 1997, most DB schemes are also required to increase pensions in payment by a minimum amount each year. This is known as indexation.
There is approximately 1% difference between the Retail Prices Index (“RPI“) and the Consumer Prices Index (“CPI“), with CPI the lesser. Many employers have been keen to move to revaluation or indexation (or both) linked to CPI in order to reduce scheme liabilities and improve funding positions. However, attempts to change have prompted many affected members to complain to the Pensions Ombudsman (“PO“).
Pension Ombudsman’s findings
The PO has stated in two recent determinations that the schemes’ proposed changes in indexation method were permissible, provided they are compatible with their respective trust deed and rules.
In September this year, the PO published its determination on a complaint submitted against Sappi UK Pension Scheme (ref: PO-23717). The complainant argued that scheme members should have been consulted prior to the scheme changing indexation method.
A month later the PO published the outcome of a complaint against Land Rover Pension Scheme (ref: PO-19569). The scheme had moved to the use of CPI as an indexation method for active members’ revaluations, whilst deferred members maintained RPI. The complainant submitted that members consent should have been required prior to the “detrimental modification”.
The PO did not uphold either complaint. These are significant findings by the PO, given their role to interpret things in favour of members where possible.
What about CPIH?
To add a further complexity to this issue, in January 2013 the Office for National Statistics announced that RPI would no longer be recognised as a national statistical measure because it did not meet internationally accepted standards.
Then in September of this year, it was announced that RPI would be aligned with a variant of CPI which includes owner occupiers’ housing costs (“CPIH“). This will happen in 2030 or sooner, with the transition commencing on a date yet to be announced. In January 2020, the Government will consult on whether to align RPI with CPIH between 2025 and 2030, and if so, when.
As stated in our earlier blog on this topic, the starting point in analysing whether a scheme should move to a new index should be a careful review of the relevant scheme’s governing documentation and the powers and discretions available to the trustee and/or employer, as the case may be.