Changing to the CPI

Changing Indexation from RPI to CPI

The following is a summary but a full article can be seen here and the OPA Press Release here.

The Government has given notice of the following changes which will affect many OPA members:

A) the proposal is to move from the RPI to the CPI as a measure of increases in prices for April 2011. This will affect immediately the annual increases for Graduated Pensions, State Second Pension (S2P), SERPS, and hence Guaranteed Minimum Pensions (GMPs). Thus all members with contracted out occupational pensions will be affected.

The Basic State Pension will be increased by the greatest of prices, earnings or 2.5%. Prices will be determined by the CPI, but for 2011 the increase will be equivalent to at least the RPI. For 2012 the increase will be CPI based if greater than either 2.5% or earnings.

B) whether an occupational scheme will apply the CPI to future increases on pensions above the GMP is dependent upon the exact wording of the Trust Deed and Rules. If the RPI is specified then the Trust Deed will have to be amended to apply the CPI How the Deed is amended will again depend upon the exact wording in the Trust Deed. It is apparent that scheme rules differ widely and trustees will need to consider what action they are permitted to take.

C) one significant consideration for trustees will be what constitute “accrued rights” in relation to members whose benefits have until now been escalated by reference to RPI.

Furthermore, unless and until the government amends the legislation, section 67 of the Pensions Act 1995 will still apply to accrued rights. Namely, if RPI or some other method of calculating annual increases is specified in the Trust Deed, then any changes cannot affect pensions in payment or revaluation of deferred pensions. The changes can only affect future service.

The government will not repeal the legislation regarding the Limited Price Indexation (LPI). This allows schemes to limit any annual increase to the LPI (currently set at 2.5%) if they wish to do so. However, this again will be entirely dependent on the wording of the Trust Deed and Rules and again section 67 will still apply.

D) OPA members are encouraged to examine the Rules of their schemes to determine exactly what they say regarding annual increases.

E) a full understanding of the implications of the switch to CPI will not be possible until the government brings forward the legislation to implement its decision. The DWP announcement says this will be “at the earliest opportunity”.

Now read Roger Turner's full article.

NB: In a briefing to MPs on 14 July the Minister for Pensions has provided an answer to the question, "What about schemes that have RPI written into their scheme rules? Will the Government introduce a statutory override to allow these schemes to take advantage of the change?":

A: "We will consider the case for a statutory override for these schemes.

However we need to think carefully about the options for how any override would operate or whether indeed this would be the best way to address the issue because we need to balance protecting pensioners’ incomes with the need to ensure that schemes remain viable for companies."

And yet as recently as 12 April 2010, Steve Webb said "We are very clear that all accrued rights should be honoured: a pension promise made should be a pension promise kept. Therefore we would not make any changes to pension rights that have already been built up. I have confirmed that I regard accrued index-linked rights as protected."

We hold the Minister to that pledge. The OPA opposes any change to accrued rights.