19th March 2018 ARC’s response to The Department for Work and Pensions’ white paper, ‘Protecting Defined Benefit Pension Schemes’

The DWP seems to have drawn a line under the CPI/RPI issue in its White Paper published today “Protecting Defined Benefit Pension Schemes”.

The White paper recognises the drafting lottery that led to some schemes becoming “unintentionally locked into a higher inflation measure “ (73% of DB schemes apparently use RPI for post-97 pension liabilities) and the arguments about “rationality and fairness”.

Allowing schemes to move to CPI would reduce pension liabilities by as much as £90 billion across all affected schemes, leading to lower deficits and employer contributions, but it would also have a long-term effect on members’ pension incomes. The DWP estimate that on average the impact per member over their lifetime could be a reduction of £12,000.

The door is fairly firmly slammed shut by this paragraph:  “Having carefully considered the financial impacts and the consultation responses we have concluded that we cannot accept any reduction in the value of member benefits and are therefore ruling out provision of a power for employers or trustees to change scheme rules so that schemes can apply inflation increases using CPI instead of RPI…

“Any across-the-board change would allow sponsoring employers to reduce their liabilities at members’ expense even if the employer had no difficulties in meeting their existing liabilities…

“The Government is not prepared to countenance a reduction in employer liabilities which might simply facilitate a transfer to shareholders of cash members are relying on to support them in retirement.”

Many trustees do have power to change index though, under their existing rules.  So far the Court decisions (like BT) have given guidance about whether various scheme-specific threshold tests in Rules are met.

There have been few schemes so far where trustees who know they have a power have used it. The White Paper comments may discourage them further, except in cases where the employer covenant and/or security of benefits are really in doubt.

Read the DWP’s white paper here

The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. ARC Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.