The Question - Has the Department for Work and Pensions mishandled the consultation on the indexation of pension schemes?

The Answers

Joanne Segars

HAVING marched us up to the top of the hill and created confusion in the pensions industry, the Government has now marched us back down again. The Government really underestimated the complexity of this issue. The pensions industry is surprised that the Government is no longer considering allowing all pension schemes to have the choice of switching their inflation measure.

While keeping many pensions locked into RPI is good news for current and future pensioners, the effect on the sustainability of final salary pensions is less positive.

Pension funds are under great stress, and some really need the breathing space that an option to switch to CPI would have given.

According to an NAPF survey, six out of ten pension schemes cannot currently make a switch, mainly because they have RPI indexation hard-wired into their pension scheme rules. However, 23 per cent said that their current rules allow them to switch to CPI, so they do not need extra government legislation to help them do so.

James Saunders
James Saunders, principal of Punter Southall

THE DELAY in the publication of the DWP’s consultation on using CPI as the measure of price inflation in private sector schemes appears to have resulted in a severe case of “cold feet” setting in. The consultation offers no measures at all for the vast majority of schemes whose pension increase rules are an accident of the drafting preferences adopted by their lawyers in attempting to replicate the legal minimum requirements.

There appears to be no appetite whatsoever for Government to help schemes and members from their arbitrary fate as to whether CPI will or won’t apply to them. Indeed the complexities have been made considerably worse by their intention not only to refrain from easing the restrictions on amendment powers contained within the dreaded Section 67 of the Pensions Act 1995 but also by casting further doubt on the interpretation of that legislation.

Steve Webb notes that the recommendations are being made to preserve and promote confidence in savings into private pensions. The CPI/RPI issue is fast reaching debacle proportions which will do nothing whatsoever to promote this aim.

Paul Jayson
Paul Jayson, partner, Barnett Waddingham

THE PROVISIONS of the consultation document dealing with ‘The impact of using CPI as the measure of price increases on private sector occupational pension schemes’ will come as a bitter disappointment to many private sector scheme sponsors.

Many sponsors have already sought to quantify the savings that they might have made on their scheme’s liabilities if they were allowed to mirror what will happen in the public sector, both in terms of ongoing funding and their corporate accounts. The problem is that many private sector schemes have RPI hard wired into their rules as the measure by which pensions will be indexed.

It was hoped that overriding legislation might have been passed to allow schemes to overcome this “drafting lottery” and be able to link pensions to CPI (generally considered to be below RPI) irrespective of the provisions of their particular rules. In the event, private sector schemes will have to hope that legislation is passed to avoid a double whammy to stop them having to provide the better of RPI and CPI, where CPI forms the minimum rate by which pensions will need to increase by law.