In a short written statement to Parliament yesterday, the Pensions Minister Steve Webb announced that the Government intends to replace the Retail Prices Index (RPI) with the generally lower Consumer Prices Index (CPI) as the basis of uprating in relation to private occupational pension schemes, the Pension Protection Fund and the Financial Assistance Scheme. This change will bring private sector practice broadly in line with recent pronouncements on public sector pensions: the government says that it regards consumer prices inflation as a "more appropriate measure of pension recipients' inflation experiences". The necessary amendments to primary legislation are to be brought forward at the earliest opportunity.
Retail price inflation has been used under pensions legislation for some time now, making this announcement potentially very significant. The resulting reduction in the value of pension benefits may be welcomed by many of those attempting to manage pension liabilities in the longer term, but in the short term we consider there may be real challenges for schemes and the change will not be welcomed by those members who see a reduction in their future pension benefits.
The impact of this change will depend on what individual scheme rules provide and how much scope the Government gives for this change to be retrospective. Employers and trustees will need to consider whether to maintain revaluation and indexation linkage with RPI, or to move towards CPI as a basis for calculation. For those who do not change, CPI will become an underpin and so both RPI and CPI calculations will be required in the future. For schemes wishing to change their approach, there could be significant problems with existing scheme rules, as many pension schemes currently contain specific references to RPI rather than referring more generally to statutory requirements. The CBI and others are therefore calling for some form of statutory override, but at this stage it is not clear whether or not this is being actively considered by Government.
We will let you know as soon as we have any more detail on the proposals. In the meantime, the text of the Minister's statement can be found here:
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The original publication date for this article was 09/07/2010.