The CPI v RPI Debate

From the perspective of the professional trustee, engaging in public debate on pensions might seem a secondary consideration, but not so when issues of pension scheme governance and the protection of members’ interests abound.

One such debate is that flowing from the Government’s statement in July about using the consumer prices index (CPI) instead of the retail prices index (RPI) as the basis of future revaluation orders – as the basis, in other words, of revaluing deferred pensions and pensions in payment.

At one level, it came across (and was probably intended) as a technical adjustment to align with changes previously announced for public sector pensions.  However, initial reaction was vocal and immediate:  it looked, as one commentator said at the time, as if it had been “snuck through the back door” and a newspaper columnist declared it to be “a shabby, retrospective reform” – retrospective because it was, and is, likely to reduce the future value of pensions by 20% or more for some individuals, and this is clearly to the detriment of pension scheme members.  KPMG estimated that business would be better off to the tune of £100bn, a measure of the reduction in value of pension liabilities.

CPI, which was introduced in 1996, has generally tracked below RPI by around 0.8%.  Most recent figures for September (which will be used to adjust public sector pensions and other benefits from April 2011) in fact showed a gap of 1.5%, with CPI at 3.1% and RPI at 4.6%.  However, the concern for private sector pensions is not just the adoption of one measure of inflation for another, but the climate of uncertainty it creates – for actuaries and trustees, for bond markets and annuity purchase contracts, for scheme administration and for trustees’ communication with pension scheme members.

Why? – because, unlike the public sector, private sector provision is dependent on the provisions of scheme-specific trust deeds, and here the devil is in the detail.  And so, the question may be asked, will a modification power be given to scheme sponsors and trustees (where it is otherwise mutually agreed) to approve the switch to CPI;  and, conversely, what safeguards will there be to prevent undue pressure being put on pension scheme trustees?  Moreover, if it is decided to adhere to RPI (and, in many cases, this will be because RPI is the measure of price inflation recognised in scheme rules), could it be that future revaluation will have to be by reference to RPI or CPI if higher?

Government is currently considering this issue, and it is likely to lead to publication later in the autumn of a consultation paper.

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