Moves to base private sector pension scheme inflation on the consumer price index (CPI) instead of the retail price index (RPI) have been met with confusion from employers and trustees.
The change, which is currently under consultation by the government, will be particularly challenging for schemes with RPI written into their rules, said Neil Carberry from the Confederation of British Industry (CBI).
Addressing delegates at the National Association of Pension Funds (NAPF) annual conference, Carberry said: “We have seen a lot of confusion partially because the announcement was less than detailed and that this kind of proposal applies differently to each pension scheme.
“Clearly there is a risk of paying out more than you might have done have without the right kind of override.”
Jay Doraisamy from Eversheds added legal issues could arise if the change in index affected pensionable service that has already been accrued by members.
“For lawyers it does throw up a number of interesting issues but there is really still a lot of uncertainty. There is a lot of discussion about what the government intends to do about the implementation of any overriding legislation to enable schemes [with RPI written into rules] to make changes.”
Employers may also face difficulties if they have sent communications to members over the years that make promises based on RPI calculations. Organisations that want make amendments to their schemes to create a level playing field may have to get the consent of trustees. A move to CPI could also be in breach of the European Convention on Human Rights, which outlines people’s rights to their own possessions.
Meanwhile, Richard Butcher from Pitmans Trustees said the change would create further pensions administration, which could be costly to manage, especially if the changes have to be applied retrospectively. He advised employers and trustees to engage with advisers as early as possible, review evaluation reports and look at what assumptions are being used to value liabilities.
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