Regulator advises trustees on dealing with shift to CPI

22 July, 2010

The Pensions Regulator has issued a statement on how trustees can mange the [proposed change] from retail price index (RPI) to consumer price index (CPI) inflation.

The statement said the impact of the shift would be scheme specific and would largely depend on each scheme’s own individual rules, as well as the final outcome of the legal changes.

It recommended that trustees review their scheme rules and be clear about what members would expect, based on what had been set out in scheme communication. It also recommended trustees engage with the scheme sponsor to work out how they would respond to changes and the impact of this on members.

Deborah Cooper, head of the retirement research group at consultants Mercer, said in some cases, shifting from RPI to CPI could result in lower increases to pensions in future.

“Trustees should take this into account when considering how liabilities should be financed, and explain the consequences of this to members,” she said.

The Regulator warned that trustees should make decisions based on the current law, and not try to pre-empt what may come in. It added the assessment of recovery plans and other regulatory activities would also be carried out on the current legal basis, although it may review this and issue new guidance if the law changes.

The statement added: “If trustees have reconsidered their scheme rules, and have had open conversations with employers, they will then be well prepared at that stage to consider any necessary action, and discuss the implications with us, if and where necessary.”

It also made clear that it expected any savings made by reduced liabilities to be passed back to the scheme, to shorten recovery plans, and not used as a cash windfall.

Andrew Bradshaw, a partner at specialist pensions law firm Sacker & Partners, said: "There has been a growing realisation amongst employers that the proposed CPI changes may have a limited impact because their pension scheme members could have a legal right to RPI increases.

“Now the Pensions Regulator is saying that it will take a dim view of employers looking to make immediate costs savings. Essentially the Regulator is saying that any savings made should be used towards funding pension scheme deficits rather than giving employers a windfall."

The statement also suggests trustees “give serious consideration” to issuing some form of interim communication to members before the results of any review are known, in order to help members planning on transferring out of the scheme, or who may be anxious, given the amount of media coverage of the issue.