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Pension funds seek clarity on inflation switch

08 December 2010

Two thirds of pensions experts think all pension funds should have the choice of switching their inflation proofing from RPI to CPI, new research revealed today.

 According to a survey by the National Association of Pension Funds (NAPF), 64% said the Government should enable all pension schemes to have the option of changing their existing rules on inflation, while 27% said it should not.

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

The research is published on the day Pensions Minister Steve Webb is due to launch a consultation on proposals to allow schemes to override their existing rules on inflation.

The NAPF survey reflects some of the uncertainty that recent Government reforms have created for pension funds, and the need for a simple, clear and workable solution.

Of the 162 respondents, half (48%) said they would make use of a new legal power to switch to CPI, while 21% said they would not. A third (31%) said they did not know.

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

The survey is not a reflection of NAPF policy, but does highlight the complexity that the CPI/RPI move has uncovered.

Joanne Segars, NAPF Chief Executive, 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.”

In the Emergency Budget the Government moved the inflation indexation of state and public sector pensions from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI). In July, it announced that it would allow private sector schemes to follow suit.

But many schemes found that the terms of their pension scheme specified RPI, and many in the pensions industry remain confused over which schemes can switch to CPI.

The NAPF, the UK’s leading pensions voice, will be putting its views to the Government consultation on how pension schemes may amend their rules and switch to CPI, which was due to be announced today in the Commons by Steve Webb MP.

 

Notes to Editors:

1. The NAPF is the leading voice of workplace pensions in the UK. We speak for 1,200 pension schemes with some 15 million members and assets of around £800 billion. NAPF members also include over 400 businesses providing essential services to the pensions sector.

2. The survey was put to NAPF members who run a defined benefit (DB) pension scheme. There were 162 responses. The survey was run in mid September 2010.

3. A summary of the survey and its findings are attached.

Contact:

Paul Platt, Head of Media and PR, NAPF, 020 7601 1717 or 07917 506 683, [email protected]

Christian Zarro, Press Officer, NAPF, 020 7601 1718 or 07825 171 446, [email protected]