Pension minister Steve Webb’s announcement that the regulatory minimum for increases to pension schemes is to move from RPI to CPI has been met with a broad welcome from scheme sponsors. How individuals will respond in the likely event that they lose out under the scheme remains to be seen.
The move has met with some conflicting views, not least around the changes’ percieved effect of tampering with benefits that have already accrued. Cutting indexation of benefits yet to be accrued is one thing, but reducing the benefits that members of the public, particularly pensioners, think they have ’in the bag’ is new territory for ministers looking to relieve the burden on employers and today’s taxpayers.
Some actuaries are arguing that the papers that have been published by the Government to date are not conclusive as to whether the change from RPI to CPI actually affects accrued benefits.
Yet whatever ambiguity there may be in the regulations published so far, a statement from the DWP appears to make its position absolutely clear on the issue. On July 12 a release from the DWP on the indexation changes said: ’The proposed changes will affect how many deferred pensions are revalued in future, and how pensions in payment are increased’.
An example contained in the statement goes further – ’A is a pensioner member of a pension scheme. His pension has been in payment for three years, and he has been receiving increases related to RPI. From 2011 his future increases will be calculated in relation to CPI. This does not affect his previous increases.’
Pension Capital Strategies has put the level of the saving at £100bn for FTSE100 companies, which will without doubt be welcomed in boardrooms across the land. But the response of those standing to lose out is yet to be tested. Not surprisingly, TUC general secretary Brendan Barber has described the move as a stealth cut on the pensions of middle income Britain, saying: “Over someone’s whole retirement this will add up to a significant loss. CPI is on average half a per cent less than RPI because it is calculated in a different way if pensions in payment today had been linked to CPI instead of RPI for the last twenty years they would now be 14 per cent lower.”
Furthermore, in the event that there are protests from scheme members once cuts in pension increases do actually kick in, the arguments put forward in defence of the change could look decidedly thin.
Param Basi, technical pensions director at AWD Chase de Vere, says: “The argument that CPI is a more appropriate measure does not stand up when you consider that pensioner inflation is recognised as being higher than RPI anyway. This change will have a double whammy impact on pensioners’ real incomes.”
The argument that CPI is a more appropriate measure does not stand up when you consider that pensioner inflation is recognised as being higherthan RPI anyway. This change will have a double whammy impact on pensioners’ real incomes
That said, one possibly unforeseen consequence that Andrew Bradshaw, partner at Sacker & Partners has discovered should in fact be welcomed by the TUC. Bradshaw points out that the Webb announcement could create a generous floor for some schemes.
“Steve Webb’s recent statement on moving to CPI for the purposes of calculating pension increases has been widely seen by employers as good news.
However, those employers with RPI pension increases enshrined in their Scheme’s governing documentation may be in for a nasty surprise,” says Bradshaw. “For these schemes, it is likely that members’ pensions will continue to be increased by RPI in line with the schemes’ trust deeds and rules going forward. But, unless the government specifically carves out such schemes, from 2011 members of these schemes may also enjoy the benefit of an additional CPI statutory underpin. In practice this could mean that if CPI were to exceed RPI in any particular year, members’ pensions would increase in line with CPI.
“Whilst most analysts expect CPI to generally be lower than RPI over time this is not set in stone for each particular year. There is therefore the bizarre prospect of some pension scheme members enjoying a benefit improvement if CPI were to exceed RPI in a particular year – probably not what most employers or the government were expecting.” In fact, CPI was higher than RPI for the whole of 2009.
Furthermore, Professor Paul Sweeting points out: “Index-linked Gilts have payments linked to RPI, which can be used to match RPI-linked benefits. However, a pension scheme paying CPIlinked benefits would not be able to match benefits as closely using indexlinked Gilts – and an insurance company might be forced to hold larger reserves to allow for the mismatch. This could have the perverse effect of offsetting the reduced cost of the benefits by requiring a higher price to be charged to compensate for the mismatch risks.”
Add in the effect on transfer values, and the task of sifting through what scheme rules actually say on indexation, and it is clear that the messages on the switch from RPI to CPI, while generally welcome by employers, are complex at best.
