Limited Price Indexation (LPI) of DB pensions in payment should be made optional from 2016 onwards to offset the pain of the removal of contracted out rebates says the Association of Consulting Actuaries.
ACA chairman Andrew Vaughan made the call in the wake of the publication of the DWP’s Red Tape Challenge proposals for easing the administrative and regulatory burden on employers offering DB schemes.
Vaughan wants schemes to have the discretion to remove LPI for future accrual to encourage sponsors to keep existing schemes open when they review the effects of the contracting out changes.
The DWP says it is considering whether to make indexation for future accruals discretionary as part of on-going work to encourage risk sharing through defined ambition pensions.
The DWP’s Red Tape Challenge work has simplified disclosure of information rules, to harmonise requirements across different schemes and extending the use of electronic communication, such as email or websites.
It is also working on a new statutory objective for the Pensions Regulator better balancing the need to protect members’ benefits with the need for sponsoring employers to be able to grow in a sustainable way.
It is also examining ways the current processes relating to employer debt that cause difficulties for charities and others participating in multi-employer schemes could be improved.
Vaughan says: “Optional LPI would allow sponsors of defined benefit schemes some breathing space ahead of what certainly I hope will be a raft of new pension options and flexibilities that will emerge from the ‘Defined Ambition’ project.
“Inevitably, ideas flowing from the ‘Defined Ambition’ project will either require some, or maybe even major, changes in legislation, or indeed there may need to be time for new market responses to take off, but these reforms are unlikely to be completed early enough to allow many of the ‘reviewing’ employers to use these new options ahead of 2016.
“I know the recent report of the Work & Pensions Select Committee hopes these reforms and easements will be ready by 2016 – that may be optimistic for some of the new options.
“And let me just be clear on what optional Limited Price Indexation for the future means. It doesn’t mean all employers have to make the change – if they wish and can afford to continue to automatically index pensions in payment then they should be free to so do. The change I propose here would not affect accrued rights.”
Publishing details of its Red Tape Challenge, which the DWP estimates will save the industry £10m, pensions minister Steve Webb said: “Our changes will save businesses millions of pounds, by streamlining and improving rules governing what, when and how pension schemes must communicate with their members.
“We are also giving the Pensions Regulator a new objective to ensure a company’s need for sustainable growth is part of its pension scheme funding negotiations.”