RPI/CPI indexation for pensions – Oh what a mess!

Däna Burstow

One week it’s the turn of the public sector and the next week it’s the private sector being told that CPI (the Consumer Prices Index), instead of RPI (the Retail Prices Index) will be used to calculate minimum:

(i)         revaluation of pensions in deferment up to retirement age; and
(ii)       indexation of pensions in payment.

But what does that mean in practice? 

It’s the law of unintended consequences for many.  For those pension schemes that have RPI hard-wired into their rules the implication is that members will receive the better of the two – one to comply with the rules, the other to comply with statute.  Surely this cannot be intended?  The policy seems to have been introduced to ease funding burdens, not increase them.

I act for a number of schemes with a history of merger where the benefit structures and rule drafting is historic.  Some sections hard wire RPI, while others don’t.  So this could mean that colleagues sitting alongside each other working in the same business will now receive different benefits from one another for no good reason whatsoever.  Madness!

To do away with these unfairnesses and inconsistencies either the Government must introduce the change only for future service (and this certainly does not seem to be what they are intending at the moment) or, if it is introduced to affect past service, make sure that the statutory restriction on changing benefits is waived and schemes are enabled to make the change if they consider it appropriate.  Even then there is bound to be a whole raft of unintended consequences arising. 

 Däna Burstow is a partner at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

Read comments below or add a comment
  1. Jerry Gandhi says:

    I agree entirely Dana but it gets even more complicated and harder to manage when it becomes allowed but optional. As you point out many schemes and organisations have been through various mergers and consolidations so if its left to what can be agreed – it will always end up either a long and difficult fight between Company/Trustees or a leveling up of the benefit.

    We have multiple schemes with differing elements of hard coded RPI provisions and some where indexation is at fixed rates. The only “easy solution” to be able to move to CPI in any form is to have the rules overridden – for both future and past (ideally).

    Maybe easier if the government simply reshaped the RPI basket to the same constituents as the CPI – I know there is also a methodology issue but again could that not be handled by evolving the index known as RPI?

    Maybe too simplistic but ……. we are trying to make pensions simpler!

  2. Brian Spence says:

    Totally agree that this government policy has not been thought through. The whole of the public sector have suspended transfer value quotations and much of the private sector too while the issues are worked through from a legal, actuarial and administrative viewpoints. We have highlighted in our blog the problem in relation to the specific issue of pensions on divorce. http://www.spenceandpartners.co.uk/archives/pensions-on-divorce-impact-of-pensions-increase-changes/

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