Over 90 per cent of sponsoring employers support legal reforms that would allow defined benefit schemes to move to CPI indexation of benefits, research from the Association of Consulting Actuaries has found.
The survey, which is conducted every two years, covers employers with fewer than 250 employers, where over 84 per cent of defined benefit schemes reporting to the survey say they are closed to new members and 57 per cent are also closed to future accrual.
Whilst some schemes have moved from RPI to CPI indexation of benefits, many have found their scheme rules too complex to progress such a change or the process too costly to enact.
The survey found 92 per cent favoured a change in the law to allow the move to CPI, although some want consent from trustees. The research found 28 per cent think all schemes should have the option to move from RPI to CPI, while 13 per cent saying it should only be allowed if trustees and employers agree. A further 22 per cent said a switch to CPI should be allowed if employers and employers agree and members have a PPF option, while 29 per cent said such a switch should only be permitted where employer insolvency was likely. Just 8 per cent said employers should stand by scheme rules.
In its recent evidence to the House of Commons work & pensions select committee inquiry into defined benefit regulation, the ACA said it supported providing a statutory override to scheme rules that would enable trustees and employers move to the statutory rates, currently linked to CPI, adding that this could result in better outcomes for money purchase members.
The ACA says schemes have ended up with complex benefit structures with different accrual rates, retirement ages and pension increases applying to different periods of service, leading to more expensive administration and more confusion amongst members. Complex benefit scales are also unattractive to insurers when schemes are considering a buy-out, it says. The ACA is calling on the government to introduce a facility whereby schemes could convert historic benefit scales to a single simplified benefit structure – on the basis of fair value. Once schemes had converted in this way, it would be open for smaller schemes to merge with each other, leading to greater efficiency and cost savings.
ACA chairman, Bob Scott says: “We do not make this suggestion lightly, but it is unlikely that scheme rules were ever intended to tie trustees to an index the National Statistician has described as flawed. It is also worth noting that compulsory indexation of pensions was introduced by the Pensions Act 1995 – many schemes provided increases on a discretionary basis prior to then – and so, we suggest that it would be appropriate for the Government to legislate to help address an issue that is largely due to the impact of previous legislation.”