Pensions minister Steve Webb says there will be no legislative override for schemes who have RPI “hard-wired” into scheme rules following the decision to switch indexation for pension increases to the consumer prices index.
It had been thought the Government would amend specific legislation to make it easier of pension schemes to adopt the new inflation measure. The formal consultation says: “Schemes with rules that specify RPI for pension increases will continue to increase pensions according to the rules, except in years where the statutory minimum calculated using CPI is higher than RPI under scheme rules.”
Addressing Parliament today, Webb said: “I am pleased to announce to the house that we do not plan to grant schemes a modification power. We believe members’ trust would have been severely damaged by this.”
Labour shadow pensions minister Rachel Reeves said: “What is being set out today is an an ideologically driven move that we oppose. If it was a time limited change, we’d be willing to support the Government.”
Webb responded by saying the Government’s decision to restore the earnings link for state benefits would give pensioners, on average, an extra £15,000. He adds: “The goal is to use an index that matches pensioner experiences.”
Mayer Brown head of the pensions practice Anna Rogers says the decision will leave members in an RPI “lottery”. She says: “We had expected the Government would help by giving all trustees a general power to change to CPI, if it is the right thing to do in the circumstances of their scheme. The consultation document ducks this issue. The Government recognises that the law is unclear, but proposes to do nothing to clarify it. This will make the decisions more difficult for trustees, because there will be more scope for legal challenge. For members it will seem to be a lottery whether their RPI increases are protected or not.”
Webb confirmed that private sector pensions increases would be uprated using CPI in July following the Government’s decision to implement the change as part of wide ranging public sector pensions reforms.
Predictions on the impact of the change vary, with suggestions it could knock up to 25 per cent from savers’ pension pots. Webb has already taken a battering from both opposition politicians and people in the pensions industry about the implications of the move. The Royal Statistical Society has also weighed into the argument, urging the Government to review the coverage and methodology of inflation measures.
The National Association of Pension Funds today that 61 per cent of defined benefit schemes cannot currently switch to CPI because RPI is “hard wired” into pension scheme rules.
Chief executive Joanne Segars says the Government has “significantly underestimated” the complexity of letting schemes switch their inflation measure. She adds: “A seeming simple change has become much trickier. Six out of ten pension funds are hard-wired with RPI at present, and around half would switch to CPI if the law allowed.”