Two-thirds of schemes tied to RPI
More than two-thirds of UK company pension schemes will be unable to take advantage of a change in the law that would have reduced their future payments to pensioners, a survey released on Wednesday will show.
The new rules allow company schemes to increase retirement benefits in line with consumer price inflation, rather than at the faster rate of retail price inflation.
But 68% of the schemes surveyed by the National Association of Pension Funds said the link to RPI is written into their trust deeds.
Unless there is a change in the law, they will not be able to link pension increases to CPI.
The survey is the first to reveal the extent to which pension promises are linked with an inflation measure that includes an element of housing cost – which has typically risen faster than inflation generally – and does not take account of consumers’ ability to switch to cheaper goods as prices rise.
Last July, Steve Webb, pensions minister, announced that in the future, public sector workers and those on social security would have increases in retirement benefits that rise in line with CPI and that private sector employers could take advantage of the slower increases as well.
Some pensions advisers had calculated that savings to defined benefit pension schemes could be very significant as a result.
A paper detailing how the private sector can put the change into effect is expected on Wednesday from the Department for Work and Pensions.
But pension lawyers have noted that many schemes have clauses specifically requiring pension payments to rise each year in line with RPI, in part because the CPI was not developed until 1996 and many trust deeds were drafted long before that date.
Section 67 of the Pensions Act of 1995 specifically forbids employers from retracting accrued benefits.
Most lawyers interpret that to mean that the right to annual uplifts in respect of service up to 2011 that rise with RPI.