No surprises: the RPI/CPI consultation response

Introduction

The Government has published its response to consultation on the switch from RPI to CPI for increases to pensions in payment and revaluation in deferment. Its December 2010 consultation followed announcements last summer that, in future, CPI would be used as the statutory minimum for increases and revaluation in both public and private sector DB pension schemes.

In this Alert:

• Key points
• No statutory override
• CPI underpin
• Pensions Bill

Key points

• As widely anticipated, there will be no statutory override or modification power to make it easier for schemes with RPI written into their rules to make the switch to CPI.
• The response confirms that a statutory easement will make a CPI underpin unnecessary for schemes which use RPI for pensions in payment.
• The Government is considering extending this easement to revaluation of pensions in deferment.
• The response was issued just in time for the second reading of thePensions Bill (on Monday 20 June) which includes wording to give effect to the required legislative changes.

No statutory override

If an occupational pension scheme’s increase rule makes specific reference to RPI as being the basis for calculating increases, a change to the scheme rules is likely to be necessary in order to switch from RPI to CPI.

Trustees asked to consider making a change will need to take legal advice on such issues as section 67 of the Pensions Act 1995 (which protects members’ past service rights and entitlements), as well as any restrictions placed on the power of amendment. The possibility of having to address these issues before switching to CPI led to calls for the introduction of a statutory override or modification power to make it easier for schemes to make the change.

But the response confirms, as widely anticipated, there will be no statutory override or modification power to make it easier for schemes with RPI written into their rules to make the switch to CPI.

CPI underpin

Schemes with pension increase rules which specify RPI will not need to provide a CPI underpin as a result of an easement. But the response indicates that amendments may be made to the (currently convoluted) easement conditions set out in the Pensions Bill to ensure that they do not act as a “disincentive to business mergers and acquisitions”. For example, where a bulk transfer is made an underpin would not be required if RPI increases have been continuously provided.

Initially, the Government indicated that a CPI underpin would have been required for revaluation of pensions in deferment. This is because indexation and revaluation are calculated in very different ways – the former accrues on a year by year basis, the latter is a one-off exercise that looks back at inflation compounded over the whole period of deferment. Over a prolonged period of deferment, RPI inflation is likely to outstrip CPI inflation, leaving only those with short periods of revaluation in the frame to benefit from an underpin.

The Government now recognises that having to test to see whether a CPI underpin bites would have a “negative impact on the cost and complexity of running [DB] schemes”. The Government is therefore looking at making amendments to the Pensions Bill to cover this.

Pensions Bill

We anticipate only minor amendments will be required to the Pensions Bill to implement the policy changes emerging from the consultation response. Although the Bill seemed on course to receive Royal Assent before the parliamentary summer recess starts at the end of July, this timetable looks increasingly tight.