Private pensions may see switch in indexation
The government has opened the way for private sector pension schemes to change the way that savings are protected against inflation.
Under the proposals, private schemes may be allowed to use the consumer prices index (CPI) to proof pensions against rises in the cost of living.
Schemes have been using the retail prices index (RPI) as the measure of rates of inflation.
Traditionally, the CPI increases at a slower rate than the RPI, so the move could help to save funds money but may also mean lower pension payments.
The Department of Work and Pensions (DWP) is to put the proposal out to consultation but insisted that any change to the rules would still enable funds to continue with the RPI index if they so choose.
A DWP spokeswoman said: “We are planning to consult on whether there is a case for introducing legislation to make it easier for schemes to adopt CPI as their inflation measure.
“Most pension schemes already have powers to make changes to their rules and it would be their decision whether to adopt CPI in the future. But no scheme will be forced to change to CPI and they would continue to be free to pay more.”
The government has already made clear, in the June Budget, that public sector pension schemes and the state pension itself will be swapping to the CPI when it comes to uprating deferred pensions and pensions payment in the future.
The Pensions Minister, Steve Webb had suggested that private sector pensions should adopt the CPI measure too.
There were concerns at the time that the government was planning to legislate in a way that meant the rules on pensions schemes would be universally amended so that those which have an RPI safeguard built into them would be obliged to make the switch.
However, the DWP has said that the consultation will not be pushing such a hardline and that fund trustees will have the freedom to come to their own decisions on whether to change indexation methods.
A government spokesman added: “A minority of schemes do not have rule modification powers and the government is considering whether, for consistency, a statutory power should be introduced to allow them to make the change to use CPI in future.”
The law on pensions stops trustees from cutting the value of accrued benefits for members of schemes, something that could, however, happen if funds move from RPI to CPI and this leads to smaller annual increases in pension values and payments.