The Pensions Ombudsman sided with pension scheme trustees in two separate cases over the decision to switch their inflation measure away from the retail price index.
With RPI dropped by the Cameron-Clegg government as an official inflation measure in 2010, some defined benefit schemes have looked to move to the consumer price index as an alternative – prompting concerns from members fearing they could lose out as a result.
Given that RPI generally runs about 1 percentage point higher than CPI, switching index can have clear financial benefits for scheme funding, but this has led to a string of court cases and growing discontent from members.
The main driver of the move to CPI for many schemes is the saving they can make by paying lower pension increases for members
Hugh Nolan, Spence & Partners
The Pensions Ombudsman sided with the Sappi UK Pension Scheme in September, ruling in favour of their decision to switch from RPI to CPI, and again last month, ruling in favour of the Land Rover Pension Scheme.
Spence & Partners scheme actuary and relationship manager Hugh Nolan said: "The Pensions Ombudsman is very keen to rule in favour of members, so it must have been pretty certain that the scheme was right.”
Scheme rules lottery endures
Mr Nolan said: “It all comes down to what the trust deed says, the exact wording of the scheme's rules will decide what you can and can't do, and because the rules are different the answers are different in every case.”
The complainants in both cases claimed the decision to switch to CPI would be a detrimental modification and breach their subsisting rights, yet The Pensions Ombudsman found these rights did not include revaluation at the time of the decision to switch.
Mr Nolan said: “The main driver of the move to CPI for many schemes is the saving they can make by paying lower pension increases for members. This improves their funding level and can protect members against the possible insolvency of the employer in future, while still giving members inflation-proofing based on an appropriate replacement index.
“A scheme funded at, say, 85 per cent and struggling to manage the deficit could find two-thirds of the problem simply disappears, at the expense of lower pension increases for members in the future.”
End in sight for RPI
Whatever the specifics of a scheme’s rules, government action on RPI could see members’ benefits downgraded across the board.
Chancellor Sajid Javid’s proposed in September that from 2025 RPI could be merged into the methods of the housing variant of CPI, CPIH.
If pensioners, and schemes holding RPI-linked assets, are not compensated, they could lose out from the change - around £30,000 over the length of an average member’s retirement.
Mr Nolan said:“If (or when) RPI is discontinued, schemes that haven’t been able to move to CPI yet may well be able to do so – including the notorious BT scheme. This could save a typical scheme with RPI increases up to around 10 per cent of their total liabilities, which will be particularly helpful for those with deficits.”
With the elections in full swing, Sackers partner James Bingham said the effects on schemes and their members are yet to be determined.
“The government at this stage are in their infancy. Once the consultation has taken place we may have a clearer sense about what this means for the future but at the moment it is unlikely to have any bearing on the ability of schemes to make a switch away from RPI.”
