Managers tussle with growing CPI complexity

Schemes need to be pre-empting member challenges by looking further back than current rules in a wholesale "forensic review" of communication and scheme documents – especially promises made to those who have transferred into the scheme – and making sure adequate disclaimers or provisions are in place. 

Unison's head of pensions, Glyn Jenkins, told schemeXpert.com internal discussions were under way on joining GMB and other public sector organisations in their challenge to switch the uprating of pension increases from the retail prices index (RPI) to the consumer prices index (CPI).

GMB said the government had "misdirected" itself on the issue, and its juridical review is part of a growing backlash against the indexation switch, with successive BA trustees resigning over an issue that "goes to the very heart of trusteeship".

In July last year, pensions minister Steve Webb announced the government's intention to switch the price measure for public sector pension schemes to CPI, and allow private sector schemes to follow suit. The move is estimated to impact more than 15 million pensioners as increases, where permitted by scheme rules, are linked to the historically lower index.

Zoe Lynch, a partner at Sackers, said said complexities were being shown up as the details of the RPI-CPI shift come through, with schemes having to search back through several generations of rules for any affected previous rules which might still apply to deferred members, and might be affected by the indexation changes.

“People are having to look back a bit further than they might first have expected," she said. "They are also responding to queries from members.

"If people are switched from RPI to CPI, members will start coming forward when they realise that is what is being applied to their benefits.”

This should be worked into a wholesale review of their past communication around RPI-CPI, from leaver’s statements to scheme booklets, making sure adequate disclaimers or provisions that the rules override.

As the RPI-CPI debate matures, pension increases are seen by legal experts as a wordier, layered area of scheme rules, and thus more difficult for an automatic shift than revaluation, where rules are simpler.

“Pension schemes will have pension increase rules that stem through periods of time," said Lesley Browning, a partner at Norton Rose. "Fewer of our clients will see a switch over there.”

It is impossible with the bigger schemes to clear all correspondence, she said. But they need to focus on those members who have transferred in, as personal arrangements on indexation would be more binding, following cases such as Steria vs Hutchinson, which upheld a personal contract with a member over scheme rules.

Schemes should ask administrators to retrieve those transfers-in and assess what promises have been made, she said.

Setting the balance

As the Pensions Bill makes its way through parliament, questions are being asked of the much-overlooked clause 16, which exempts cash balance schemes from the indexation requirements.

“I’m not sure if that was on many people’s radar," said Lesley Harrold, a know-how lawyer at Norton Rose. "I think it’s because the government recognises cash balance schemes are similar to defined contribution schemes at the point that benefits are taken, in that members have a pension pot which is used to provide a pension.”

This a grey area, she added, as cash balance are also similar to defined benefit (DB) schemes in aiming to give a certain level of pension – making this a further complication to the fairness issue.

Jenkins signalled cash balance – which was considered by Hutton's reform commission, and then rejected – would be a part of government negotiations over the reform of public sector pensions.

"[But] we don't have a very good view of cash balance schemes, in the main," said Jenkins. "We certainly think they will be inappropriate for most workers, public or private, compared to a good DB scheme."