Last month's Budget announced the Government's intention to link increases to public sector pensions in payment to increases in the Consumer Prices Index ("CPI") rather than to increases in the Retail Prices Index ("RPI").
It has been followed by two statements from the Minister of State for Pensions in which he has confirmed that, for private sector pension schemes, the reference Index for the purpose of calculating the minimum rate of revaluation of deferred retirement benefits and the minimum rate of increases to pensions in payment (both as required by statute) is also to change to be CPI, instead of RPI. The changes are to take effect from 2011.
Because of the different ways that CPI and RPI are calculated, it is anticipated that this will result in significant savings to pension schemes and, consequently, will make the funding of those schemes more affordable to their sponsoring employers. It has been suggested that pension scheme liabilities could be reduced by as much as 10% or £100 billion.
Significantly, the Minister's statements make it clear that the changes will be capable of being applied not just to benefits that are built up from the date of the changes, but also to benefits that have already been accrued (to the extent that they are subject to minimum statutory rates of revaluation and/or increase). However, individual schemes may be subject to wider statutory restrictions on applying the changes to benefits that have built up prior to the date on which the changes come into force, and it may be that facilitating legislation will be required to overcome those restrictions or that, in practice, it will only be possible to apply the changes in relation to benefits built up after they take effect.
More detail is to follow from the Government and scheme documents may need to be updated to reflect the revised legislation, but this a significant change to the basis of pension provision within the UK.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
