CPI legislation will increase scheme costs

Legal experts said without future legislation on the shift to the consumer prices index (CPI), schemes with rules requiring RPI revaluation will need to double their workload every time they conduct a revaluation for a member retiring after a period of deferment.

And the government's decision not to introduce a statutory override for schemes wishing to switch their indexation or revaluation rules will require a 60-day period of consultation with members to introduce the "listed change" to their rules.

If a previous consultation they have undertaken on a possible CPI shift does not meet this criteria, it will need to be redone under the plans.

In its consultation response, the government said many groups had asked why the government had not extended the removal of the CPI “underpin” for deferred pension increases, as it was planning for pensions in payment.

This “underpin” is where schemes which choose to continue linking to RPI would be forced to pay the higher of CPI and RPI in a given year.

Without amending legislation, those schemes will need to carry out two revaluations to see which is higher – one based on the scheme rules and one using the statutory revaluation order – every time a deferred member comes to retirement.

Anne-Marie Winton, a partner at Nabarro, said: “No doubt this will increase scheme administration costs.”

The government said in its response it was “looking at” tabling an amendment to the Pensions Bill which would get around these “costly and time consuming” processes, but provided no guarantee.

The bill passed its second reading last night but faces a difficult timetable to be signed into law before parliament’s summer recess on July 27.

No override

The government’s final decision on a wholescale RPI-CPI shift was it would not be “appropriate to override the rules of schemes that in some cases provide better benefits than the statutory minimum”.

Zoe Lynch, a partner at Sackers, said the RPI-CPI switch had already generated many challenges for schemes and “lots of queries and concern for their members”.

Those schemes which were hoping for a legislative override to move their indexation link to the historically lower measure of inflation will now find it harder to make the switch.

She said: “In order to switch for CPI they’ll have to make rule changes if they specify RPI at the moment, and you can’t make a rule change which affects past service benefits because of the restrictions on making amendments in the 1995 pensions act.”

Lesley Browning, a partner at Norton Rose, said the government has failed to appreciate the original drafting of RPI in some scheme rules was “simply a different way of incorporating the statutory regime”.

Those draftsmen that explicitly linked to RPI were not consciously making an eternal link between their scheme and that index, but trying to be “helpful”, she added, by spelling out what the statutory regime then required.

“In legislating in this way the government is adopting a policy that has unfair results for private sector schemes,” she said.

“If the government is of the view CPI is the appropriate measure, then it should be the measure for all private sector schemes.”

Winton said there was a track record of such intervention, so it was “difficult to understand” why the government felt it appropriate in this area, unless it was concerned about a backlash.

As the law now stands, she said, a change to scheme rules on indexation and revaluation will be a “listed change” requiring a minimum of 60 days’ consultation with affected members.

She added: “If any employer has already tried to amend scheme rules, this will need to be revisited if proper consultation was not carried out. This could be a nasty surprise.”

The government has promised to provide a revised assessment of the changes arising from the consultation.