The switch from RPI to CPI – consultation published

Introduction

The Government published its long awaited consultation on the switch from RPI to CPI for increases to pensions in payment and in deferment on 8 December 2010. Widely reported as a potential reduction in liabilities for the public sector, private occupational pension schemes have been waiting since July to find out the Government’s plan for them.1

Key points

The 2010 Revaluation Order has also been published and uses the CPI figures for statutory increases on or after 1 January 2011. This will apply to schemes that use the statutory method for making increases.
For those schemes whose rules specifically refer to RPI as the basis for measuring increases, switching to CPI is likely to require a scheme amendment.
There will be no statutory easement to make it easier for such schemes to make the switch to CPI.
However, the good news is that there will be no requirement for those schemes which use RPI to change to CPI – making a CPI underpin unnecessary.

Revaluation Order

Scheme rules which either specify that statutory increases apply (or are silent on the subject of increases) are likely automatically to follow the Revaluation Order from 1 January 2011.

The 2010 Order uses the September CPI figure (3.1%). Increases already granted on pensions in payment will be protected but future increases on the whole pension will be based on CPI not RPI.2 Taking a simple example, this means that an annual pension of £10,000 in 2010 increased by CPI will be worth £10,310 next year, rather than £10,460 if it had been increased by RPI (which was 4.6% over the relevant period).

The Order will come into force on 1 January 2011. Any scheme which makes its increases to pensions in payment on or after 1 January will therefore automatically reflect the CPI figure, despite the original announcements suggesting that the switch would only take place from April 2011.

Scheme rules which specify RPI

If an occupational pension scheme’s increase rule makes specific reference to the RPI as being the basis for calculating increases, then a change to the scheme rules is likely to be necessary in order to effect the change from RPI to CPI.3

Although rumoured, a statutory easement to make changes to rules easier to implement in these circumstances has not materialised in the consultation. Any changes will therefore need to be made using the scheme’s amendment power. As most amendment powers require the consent of both the employer and trustees, this leaves trustees at the heart of the decision making process.

Where trustees are asked to consider amending scheme rules to make the switch to CPI, they 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). In addition, a proposed change to the consultation requirements will mean that members will need to be consulted on any switch prior to making the change.

No CPI underpin

Schemes with increase rules which specify RPI will not need to provide a CPI underpin.

There had been press speculation that an underpin would be required for increases to protect pensions in any years where CPI exceeds RPI. This stemmed from the fact that, although the switch to CPI is likely to lead to lower increases for pensions in the longer term, there have been several instances in the last few years where CPI was higher than RPI.4

Government Rationale

In the run-up to the publication of the consultation the Government has justified the switch to CPI in the public sector on the basis that very few pensioners still have a mortgage, making the CPI “basket” more appropriate than RPI as a measure of inflation for pensioners.5 But despite this the Government have decided not to impose the change on the private sector, saying “in considering the case for statutory intervention, the Government is mindful of the need to preserve and promote confidence in saving in private pensions”.

1 See the DWP press release dated 12 July 2010 and our Sackers Extra Alert: “Pension Increases – the change from RPI to CPI” dated 13 July
2 The rate of increase (or revaluation) for deferred pensions will change in a similar way; contracted-out benefits may be revalued differently
3 Some scheme rules allow the Trustees and/or employer to choose the most appropriate index
4 For instance, the September figures for CPI in 2008 and 2009 were higher than RPI
5 The RPI “basket” of goods differs from the CPI basket, principally by the inclusion of housing costs