RPI to CPI as the measure of price inflation: how are pension schemes and their members affected?

26 July 2010

Earlier this month, the Minister of State for Pensions announced the Government’s intention to move to using the Consumer Price Index (“CPI”) as the measure of price inflation for the purposes of regulating occupational pension schemes, rather than using the Retail Prices Index (“RPI”).

A statutory minimum requirement will continue to apply to the revaluation and indexation of pension rights. The Minister stated that:

“The proposed changes will affect how many deferred pensions are revalued in future, and how pensions in payment are increased. The changes apply to defined benefit rights in occupational pension schemes, and certain defined contribution rights in occupational pension schemes. The changes will affect the statutory minimum requirement for revaluation and indexation; occupational pension schemes will still have the freedom to pay more than the statutory minimum.”

The Pensions Regulator (“Regulator”) has this week published a statement on the Consumer Prices Index intended to assist trustees and employers in managing the impact of the proposed changes, and to outline how the Regulator will deal with this issue in our regulatory processes.

Once changes - including any legislative provisions - are finalised the Regulator will expand this guidance and provide further information on the principles it will use to deal with any impact on schemes currently engaged in the Regulator’s regulatory processes.

You can view and download the statement on the Regulator's website

Comment
The Government will ensure that references to price inflation in pensions legislation are consistent with using CPI as the measure of price inflation from 2011, rather than RPI. At the moment, trustees can choose to keep RPI as the measure of price inflation if the trustees agree. Many Schemes will have RPI as the measure of price inflation written into their rules and so there will be need to be a specific amendment to the trust to allow CPI to be used as the measure.

On the other hand, there is speculation that the Government may empower employers, whether in the public or private sector, to force through the use of CPI rather than RPI, thereby achieving pension benefit cuts, against Trustees' wishes. The Government has not ruled out speculation that it is considering this option. To illustrate the scale of the savings for a Scheme, the BBC has stated that:

“On average, you might expect CPI inflation to be roughly 0.5% to 0.75% a year below RPI inflation, but the gap is forecast to be bigger in each of the next five years. For a pensioner currently receiving £10,000 a year, this means a pension of £11,400 rather than £12,200 in 2016.“

Such savings can only come from the lesser amount of benefits paid to pensioners in schemes that adopt the CPI as the measure of inflation.

We suspect that many non-public sector employers who wish to save money will ask Trustees to adopt the CPI rather than the RPI index.