Pension indexation changes 'to be easier'

Image caption, Moving from RPI to CPI for inflation linking would usually reduce the value of pensions

Private sector pension schemes may be allowed to use the Consumer Prices Index (CPI) to protect pensions against inflation, the government says.

The Department for Work and Pensions (DWP) will begin consulting on new legislation soon.

This legislation will let schemes replace the traditional retail prices index (RPI) for inflation-proofing.

However, the DWP said any new law would not overrule schemes that still wished to use the RPI.

"We are planning to consult on whether there is a case for introducing legislation to make it easier for schemes to adopt CPI as their inflation measure," said a DWP spokeswoman.

"Most pension schemes already have powers to make changes to their rules and it would be their decision whether to adopt CPI in the future.

"But no scheme will be forced to change to CPI and they would continue to be free to pay more," she added.

Big changes

In its June Budget, the coalition government announced that public sector schemes, and the state pension itself, would start to use CPI rather than RPI for the annual uprating of deferred pensions and pensions in payment.

This will save the government many billions of pounds each year as the CPI usually rises at a significantly slower rate than RPI.

In July, the Pensions Minister, Steve Webb, said he wanted CPI to be used in a similar manner by private sector occupational schemes.

"The government believes the CPI provides a more appropriate measure of pension recipients' inflation experiences," he said at the time.

This raised concerns that the government might be intending to introduce a law that automatically re-wrote the rules of all pensions schemes, which often have the use of RPI "hard-wired" into them for pensions in payment, replacing the use of RPI with CPI instead.

The DWP has made it clear that its forthcoming consultation will not take such an aggressive approach and will aim to let trustees make their own decisions.

"A minority of schemes do not have rule modification powers and the government is considering whether, for consistency, a statutory power should be introduced to allow them to make the change to use CPI in future," a government spokesman said.


Pension law prevents trustees from reducing the value of the accrued benefits of their members, which might happen if CPI rather than RPI was used, as it would lead to smaller increases in the value of pensions each year.

In addition to legal constraints, scheme rules often place the same restriction on any detrimental changes.

Claire Carey, a partner at the pension law firm Sackers, said the government's precise intentions were not yet clear, but it looked as if it might become easier for schemes to move to using CPI.

"A statutory easement to allow schemes to make the changes is clearly on the cards," she said.

Tom McPhail of the financial advisers Hargreaves Lansdown said: "The government is looking to make some wiggle-room for pension schemes."

Mark Duke, of the actuaries Towers Watson, warned that this might be tricky to achieve: "Reducing members' benefits is a very difficult task because 30-years worth of legislation has all been in the opposite direction."

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