Impact of the change to CPI
Impact of the Government’s move to the Consumer Price Index (‘CPI’) as the measure to increase pensions
The Government has now published its consultation on the proposed switch from the Retail Price Index (‘RPI’) to the Consumer Price Index (‘CPI’) as the measure of inflation it will use for increases to pensions in payment and pensions in deferment. This article outlines what this means and how this is likely to impact you.
Each year the Government publishes details of the increases to be applied to pensions in payment and pensions in deferment. Previously these increases were based on RPI. The Government has now announced it intends to switch to CPI as the basis for calculating these increases.
Many schemes have rules which refer to the Government's minimum requirements as the basis for the increases they apply to pensions in payment and pensions in deferment.
What does the proposed switch mean for the Plan?
The Trustee of the Plan has discussed the change with its legal advisers and, based on the way the Rules of the Plan are worded, anticipates members being impacted in the following ways –
Pensions in payment
There are two elements to the pension you receive from either Section 2 or Section 3 of the Plan. These elements are:
- the Guaranteed Minimum Pension (GMP); and
- the excess over GMP.
GMP is likely to form a small proportion of your pension from the Plan. The increase to be applied to this element of your pension is directly linked to legislation. Therefore, in future, increases to the GMP element of your pension are expected to be linked to CPI.
The majority of your pension will be the excess over GMP. This will remain linked to RPI (capped at 5% if you are a member of Section 2) due to the way the rules of the Plan are worded. So overall there is unlikely to be a significant change to increases applied to pensions in payment.
Pensions in deferment
Deferred pensions will continue to be revalued with reference to the legislation published by the Government. This is expected to be linked to CPI (up to a maximum of 5% for pensionable service accrued before 6 April 2009 and a maximum of 2.5% for pensionable service accrued after 6 April 2009) so in future increases applied to pensions in deferment will be linked to CPI instead of RPI.
However, once you retire and start to receive your pension this will be increased as outlined in the pensions in payment section above.
What do I need to do now?
No action is required. The Trustee is not making any changes to the Plan Rules. Any changes that are noted above will come into effect because the Plan Rules refer directly to legislation published by the Government.
The Government’s consultation closes on 2 March 2011. Following the end of the consultation it is possible (though unlikely) that the impact on the Plan could change. We’ll keep you updated.
Inflation - is a rise in the general price of goods and services in an economy over a period of time. RPI and CPI are both ways to measure this rise.
CPI – is the Consumer Price Index. This is a method of evaluating changes in the price of a ‘basket’ of goods and service to determine inflation. The contents of the basket and the method of calculation differ to RPI e.g. CPI excludes a number of items relating to housing costs (such as mortgage interest payments and council tax).
RPI – is the Retail Price Index. Like CPI this is a method of evaluating changes in the price of a ‘basket’ of goods and service to determine inflation. The contents of the basket and the method of calculation differ to CPI (see above).
Pensions in payment – refer to the pensions paid to members who have retired from the Plan.
Pensions in deferment – refer to the pensions for those members who have left the company that remain held in the Plan until their retirement.
GMPs - were introduced from 6 April 1978 to allow occupational defined benefit pension schemes (like the O2 Pension Plan) to contract-out of the second tier of state pension provision (now the State Second Pension). Section 2 and Section 3 provide contracted-out benefits. Schemes which were contracted-out on a GMP basis must provide members with benefits which are no less than a specified minimum, so that a contracted-out member does not lose out because they no longer receive all the elements of the state pension. Although there has been no further accrual of GMPs since 5 April 1997, the Trustee still needs to administer the GMP rights accumulated up to that date.