Impact of switch to CPI on occupational pension schemes – Government consultation

In July 2010, the Government announced that it intended to use the consumer prices index (CPI) as the basis for the statutory minimum revaluation and indexation of occupational pension schemes instead of the retail prices index (RPI). This change will be effective from the beginning of 2011.

The Government has published a consultation paper today looking at the impact that the switch to CPI will have on occupational pension schemes. In particular, it is seeking views on whether there should be legislative provision to assist schemes in moving to CPI if this is their preferred inflation measure.

The key points made in the consultation document are:

• It acknowledges that some schemes whose rules refer to RPI will want to amend them and move to CPI. This change would not currently be one which members needed to be consulted about under the Employer Consultation Regulations. The Government proposes to change this position as soon as possible so that amendments which affect indexation and revaluation would require consultation.
• The Government does not propose to introduce a statutory override that would alter provisions in the rules of occupational pension schemes which explicitly refer to RPI. In its view, this would represent “an unwarranted interference in the rights of employers and trustees to manage their financial affairs”, be unnecessarily complex and be unfair on members where employers were willing to continue to fund RPI increases.
• There are no plans to interfere with existing contracts for buy-outs or buy-ins or existing annuity contracts.
• An alternative to a statutory override would have been to make it easier for schemes to amend their own rules if they wanted to. However, the Government does not propose to do this on the basis that it would be difficult to introduce legislation that targets only those schemes where the RPI provisions in the rules were attempting to match the statutory requirements. Granting wider powers would mean that schemes could override provisions in their rules on indexation and revaluation regardless of why they were drafted in that way.
• For schemes that refer to RPI in their rules, the Government proposes to ensure that they would not have to pay any increases at the higher of CPI or RPI in any given year. This means that schemes providing RPI increases will not also need to ensure that they have a CPI underpin.

Views are still sought on these proposals and consultation closes on 2 March 2011. The Government is also seeking views on whether there are any issues which need to be dealt with in relation to career average schemes and guaranteed minimum pensions.

A full copy of the Consultation Paper is available here.