04 February 2011 - Post by:Andy Cork
The move from the retail prices index (RPI) to the consumer prices index (CPI) for revaluing pensions in deferment and increasing pensions in payment has dominated my work in January. So no apologies for returning to the subject again for the third time after Däna Burstow’s thoughts on the initial announcement and Helen Powell’s comments on the underlying actuarial issues.
The speed with which the government made this change has meant that we (trustees, companies and advisers) have all had some catching-up to do. The initial government announcement back in August was simple enough – for pension purposes, the government intends to use CPI as the basis for determining the percentage increase in prices in 2010. So, on the one hand, we’ve all had fair warning that the change was on its way.
But it wasn’t until 8 December 2010 that we knew how it would apply (or not apply) to schemes that did not directly import the statutory basis. That didn’t leave much time for a change that is effective from 1 January 2011. We are also left with the slightly odd situation of an ongoing government consultation on issues surrounding the change to the CPI basis, while the substantive change itself has already been made.
So what are the changes? The government ultimately decided (for private occupational schemes, at least) to take the simplest approach and change the underlying statutory order. The primary legislation will only be changed where absolutely necessary. In the words of the government: “the only difference this year is that [the statutory order] uses the September CPI figure.” Sounds simple?
Well, yes and no. It is easy for government perhaps because it meant little primary legislation was required to make the change. But it’s not quite as easy for trustees.
It means that they need to look at their revaluation and pension increase rules to understand whether they apply the statutory minimum (and should use the CPI basis) or whether the rules explicitly apply RPI (in which case members are probably entitled to RPI for the time being). That’s not too bad for a scheme with a short and straight-forward history. It is less easy for a scheme that has been around for decades and has grown through scheme mergers. In this case, members may well have different benefits depending on when they left the scheme and how the rules were drafted at the time – try explaining that in an employee communication.
I’ve seen a number of our trustee clients wrestle with this problem over the past couple of weeks – each time there are different issues to resolve – and no-one seems convinced that this is part of ongoing pensions simplification.
Andrew Cork is an associate at Allen & Overy LLP