NAPF research: Employers should be able to choose inflation measure

Almost half (48%) of NAPF members which run a defined benefit (DB) pension scheme would use a new legal power to switch from inflation indexation from the retail prices index (RPI) to consumer prices index (CPI).

A further 21% said they would not and 31% said they did not know, according to a survey by the National Association of Pension Funds (NAPF).

In June’s emergency Budget, the government moved the inflation indexation of state and public sector pensions from the RPI to the CPI. In July, it announced that it would allow private sector schemes to follow suit.

Two thirds (64%) of respondents thought all pension funds should have the choice of switching their inflation proofing from RPI to CPI, while 27% did not.

The study also showed that six out of ten (61%) cannot currently make a switch, mainly because they have RPI indexation hard-wired into their pension scheme rules.

Opinion was split over the level of trustee backing that should be needed to make use of any new legal override. More than half (55%) said the employer could make a switch with trustees’ consent, 29% said without trustees’ consent, and 16% specified the trustees alone.

Joanne Segars, chief executive at the NAPF, said: “The question of whether a pension can move to CPI is making it very difficult for pension funds to plan ahead.

“The government has significantly underestimated the complexity of letting schemes switch their inflation measure. A seemingly simple change has become much trickier.

“Six out of ten pension funds are hardwired with RPI at present, and around half would switch to CPI if the law allowed. But that does not mean all pension funds would opt for CPI, and opinion is split on whether employers alone should be able to authorise the switch.

“Moving to CPI can give a pension fund some much-needed flexibility, but there are implications for current and future pensioners. Trustees and employers know that any switch must be handled carefully.”

Pensions minister Steve Webb is due to launch a consultation on proposals to allow schemes to override their existing rules on inflation later today.

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