Ian Neale from policy specialists Aries Insight looks at the recent debate around indexation, revaluation and section 67.
The counter-argument is that any amendment or relaxation carries unacceptable risks to members' "subsisting rights", as well as creating conflicts between trustees and sponsoring employers.
Conditional indexation introduces all kinds of difficulties, including moral hazard, as employers could engineer unaffordability
In particular, the debate has focused very much on what a subsisting right is under the act, and whether it includes the indexing of future benefits relating to benefits already earned by past service. Within that, the issue explored in several key court cases has been the measure of inflation and whether this means retail price index, or if trustees can choose some other index instead – typically consumer price index.
A subsisting right in relation to members of an occupational pension scheme means, at any time:
any right which at that time has accrued to or in respect of them to future benefits under the scheme rules;
any entitlement to the present payment of a pension or other benefit that they have at that time, under the scheme rules.
A similar definition covers survivors.
Many employers (and some trustees) would like to change the scheme rules to use CPI instead of RPI without fear of breaching s67.
In Danks v Qinetiq, the judge found that a switch from RPI to CPI would not be a detrimental modification to subsisting rights, because the entitlement to an RPI increase does not arise until the date the increase is made. Arcadia Group v Arcadia Group Pension Trust concluded similarly. But then in the case of Barnardo's, it was decided trustees did not have the power to replace RPI.
The primary legislation does not prescribe RPI; instead it refers to an inflation percentage specified by the secretary of state based on the "percentage increase in the general level of prices".
Calls for statutory override are not new
CPI, the government's chosen measure since 2011, is usually, though not always, lower than RPI; so some trustees have come under pressure to award pension increases and revalue deferred pensions based on CPI. Such a move – provided it is permitted by scheme rules – would often reduce the cost to the employer, but might also make a significant difference to members' benefits in the long term.
Consequently, a head of steam has built up in favour of the introduction of a statutory override, to enable schemes prevented by the construction of their rules – often drafted in an era when the terms 'RPI' and 'inflation' were practically interchangeable – to adopt CPI instead of RPI.
Industry divided over retrospective changes to pensions
Nearly half of pensions professionals and scheme representatives believe that retrospective changes to pensions promises should be allowed, according to a recent survey, suggesting growing concern over the level of defined benefit liabilities.
This is nothing new: it was rejected by the government in 2010, on the grounds that it would be an unwarranted interference in the rights of employers and trustees, and could complicate existing employment contracts.
The 2017 green paper on defined benefit asked whether the law should be altered to make indexation conditional on whether the employer could afford it, which introduces all kinds of difficulties, including moral hazard, as employers could engineer unaffordability.
As a matter of principle, very careful consideration should be given to repealing primary legislation. Is the original purpose still valid? Have subsequent developments, in legislation or practice, rendered it unworkable in any way? The law of unforeseen consequences should inhibit tinkering.
No strong case for wholesale repeal of s67 is evident to this author. However, if it is accepted that members' reasonable expectations are inflation protection, there is a case for unlocking scheme rules to permit any officially recognised measure.
Ian Neale is director at policy specialists Aries Insight
