Defined Benefit  

Government action expected on pensions inflation link

Government action expected on pensions inflation link

The government is expected to address the relationship between inflation and defined benefit (DB) pension schemes in its forthcoming white paper, but industry experts fear it will fall short of the revolution needed to end long legal battles in court.

Since 2010, the government has dropped the retail price index (RPI) as an official inflation measure, switching to the consumer price index (CPI).

DB schemes can change to the CPI, as long as its own rules don’t specifically mention RPI. This was the case of BT, which saw the High Court recently denying its request to change the inflation measure.

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DB schemes members’ benefits would decrease by £80-90bn if their pension schemes were allowed to switch from the outdated RPI, according to data from the Department for Work and Pensions (DWP).

Sarah Brown, principal of transaction services, at Xafinity Punter Southall, said: “It is almost a bit of a lottery based on how the scheme rules were drafted - some of them went straight to CPI while others are locked-in to RPI and can't change it without more legislation from the government.

“Moving from RPI to CPI could actually reduce the scheme total liabilities by around 10-15 per cent. In a context of £500m scheme, that's a £50-75m saving, so that is why is such a big deal for schemes.”

Ms Brown argued that the government could come up with a middle ground solution for distressed schemes, “when it looks like they might end up in the PPF and members will have a benefit cut anyway”.

She said: “I think that might be the first focus for the government, actually looking at where there is a genuine issue of affordability, and if they could be allowed to move to CPI - but that is very difficult to access.”

Sir Steve Webb, director of policy at Royal London and former pensions minister, said the government will have to mention this topic in the DB white paper, due to be published in the spring.

However, he doesn’t believe that there will be any changes on this.

He said: “It would be controversial and brave [to propose any solution]. It's possible in extremis.

“If it is going to make a difference, it is going to affect big schemes, and would mean a lot of people getting smaller pensions, which is controversial.”

A spokesperson at the Department for Work and Pensions declined to comment on this matter, saying that the government doesn’t “speculate on the content of forthcoming policy papers”.

The issue, which has been debate almost during a decade in the pensions industry, is making a comeback, with people such as the Bank of England governor Mark Carney arguing that CPI should be only one measure of inflation used by the government.

Ms Brown added: “There is a rising tide of people talking about this issue; the fact that we have people like Mark Carney talking about it has put it back into focus in the agenda.