Consultants have reported more employers trying to overcome the difficulties of switching from using RPI to CPI to reduce scheme liabilities as the gap between the two measures widens.
The gap between the two indices opened slightly in January, with CPI falling to 1.9 per cent from 2 per cent in December, and RPI rising 10 basis points to 2.8 per cent, according to the Office for National Statistics.
Many schemes switched to using CPI to calculate future benefit accrual when the secretary of state announced in 2011 that the index would be used to calculate public sector and state pensions.
Whether a scheme uses RPI or CPI to value deferred benefits or pension increases is written into its rules. This can be difficult to change since section 67 of the Pensions Act 1995 prevents trustees making changes that affect past service accrual.
The savings for an employer can be significant if schemes switch to CPI, said Neal Thompson, actuary at First Actuarial. “The long-term view as to what the difference could be [depends] as to where the financial conditions are, [but] somewhere between half and 1 per cent,” said Thompson.
Some scheme rules explicitly state RPI or CPI will be used to measure the value of benefits, while others refer to “something linked to inflation”, said Lynda Whitney, partner at consultancy Aon Hewitt.
“Often people thought they were writing the same thing in the rules if they wrote down RPI or [set it according to the secretary of state's official measure],” Whitney added.
Schemes that have discretion built into their scheme can switch. Making changes to apply to future benefit accrual is more straightforward, although employers tend to opt for more radical options such as future pensionable pay caps, Whitney said.
In cases where a scheme’s rules dictate that benefits increase in line with RPI or a rate approved by HM Revenue & Customs, some employers have questioned whether in the latter instance rates could now be determined by the discretion of employers or trustees, as HMRC is no longer required to approve a scheme’s rules.
Matthew Swynnerton, partner at DLA Piper, said he had two clients exploring the option of switching from RPI to CPI. “All of this is leading to saying it’s possible to make changes but requires trustees and employers to consent,” said Swynnerton.
However this introduces an extra dilemma for trustees over whether they should consent to making a change that would weaken pensions for members, he added.
Employers and trustees should also consider the impact of a switch to CPI on their investment strategy since the market does not provide CPI-matching assets, Whitney said.
“Because you can’t match CPI and therefore get something to cost you less, you can’t derisk that element,” she said.
