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Private Sector Company Defined Benefit Pension Schemes:
Pensions Increases – RPI v CPI

25 March 2011

This is to update members on developments on this crucially important issue that was recently considered by the Association’s Executive Committee.

It is now certain that as a result of government policy, pension increases in many schemes (including the Railways Pension Scheme – RPS) will in future be linked to the Consumer Prices Index (CPI) instead of the Retail Prices Index (RPI). This is a bad deal because, almost invariably, the CPI records lower levels of inflation than the RPI. Pension increases in the RPS are based on the inflation indices for September. RPI in September 2010 was 4.6%, CPI was 3.1% - a difference of 1.5%.

Given the important and complex nature of the issue this circular attempts to explain in some detail the issues involved and possible ways of tackling the problem.

My company pension has always been increased in line with RPI how can it be changed to CPI?

Basically it’s a bit of a lottery – it depends on how the rules of the pension scheme are written. If the rules actually say pensions will be increased in line with RPI then this will continue. However, many schemes (including the RPS) refer to increases in line with government legislation – in the case of the RPS the Pensions (Increase) Act 1971. Increases are brought about through what is known as secondary legislation (Statutory Instruments/Parliamentary Orders). Whilst until now the measure of inflation used to increase pensions has been RPI, the government is not required to use any particular measure of inflation – they could use RPI, CPI or any other measure.

How did this change come about?

In the Emergency Budget (June 2010) the government announced it was going to use CPI instead of RPI as the measure used for increasing (both deferred pensions and pensions in payment) public sector pensions from April 2011. Subsequently, on 8th July 2010, the Minister of State for Pensions (Steve Webb, MP) made a Written Ministerial Statement to Parliament announcing the government’s intention to move to using the CPI as the measure of price inflation for the purposes of increasing private sector occupational pension schemes.

Understandably this raised major concerns amongst trade unions, scheme members, pensioner organisations as well as trustees, scheme administrators and others across the pensions industry.

On 8th December 2010 the Pensions Minister made a statement to the House of Commons that was, amongst other things, meant to clarify the issue. This statement followed mounting speculation (even in the Tory press) that the government was planning to force the switch to CPI pension indexation even if this meant overriding pension scheme rules that currently stipulated RPI increases. The Minister said the government proposed legislation:

- to ensure pension schemes that choose to stay with RPI do not have to pay CPI in those years when CPI was greater than RPI.
- to include indexation and revaluation on the list of changes* (see below) where employers are required to consult with their employees.
- to consider what to do when schemes specifically state that RPI should be used and when they do not have the power to amend scheme rules.

*This is a major change – surely we should have been consulted?

Yes it is a major change that will over a period of time have a big impact on the value and purchasing power of members’ pensions. However, under existing legislation changing the way in which increases are made does not require consultation. Indeed, it is astonishing that in his statement to the House of Commons on 8th December the Pensions Minister said “I was surprised to learn that schemes had been able to change indexation and revaluation without any duty to consult employees”. Well he should have known, especially as this government policy impacts on hundreds of thousands, if not millions of citizens throughout the UK. This demonstrates both incompetence and a serious lack of preparation on the part of the government who rushed ahead regardless of the consequences. Also worrying is the financial impact on those affected by the political motivations of a government apparently intent on attacking the living standards of workers through incomes and occupational pensions policy adding to the pain resulting from public expenditure cuts.

Provisions of the Pensions Act 2004 require employers to consult with members before they can make certain ‘listed changes’ to a pension scheme. Listed changes include increasing normal pension age, closing a scheme, changing from defined benefit to defined contribution, ceasing or reducing defined benefit accrual or reducing an employer’s contribution to a defined contribution scheme.

TSSA policy on the change to CPI

TSSA is vehemently opposed to the changes on the following grounds:

- Impact on value of members’ pensions, the commulative effect over the period the pension is in payment will be substantial. Government policy on indexation can only make things worse, especially if confidence in the security of pension benefits is undermined leading to members leaving their pension schemes as they see pension promises broken and values reduced. For a number of reasons e.g. low pay rises, high inflation, public expenditure cuts and rising unemployment, personal and family budgets are under more pressure than they have been for generations. This government policy can only add to the stress.

- The apparent retrospective nature of the changes. This concern applies equally regardless of whether the change applies to public or private sector schemes. Pensions form part of an employee’s total remuneration package that is either negotiated collectively or agreed on an individual basis. Worsening the value of any element of such agreements without agreement is fundamentally unfair.

- The level of pension benefits and contributions (in many cases) have been based on the actuarial assumption using RPI inflation pension increases being applied and paid for a benefit individuals will not/no longer enjoy. In other words they and their employers have paid for something they won’t get in retirement or will no longer receive in the case of those already in receipt of pensions.

- Pension scheme literature in many cases refers specifically to RPI increases. Regardless of the precise legal status of such documentation in upholding an individual’s entitlement to RPI increases, most fair minded people would rightly consider these to accurately reflect this entitlement. The government should pay due regard to undetakings given in plain language in pension scheme literature rather than the often inpenetrable language and small print used in scheme rules and associated legislation. In not doing so politicians only increase the distrust of the general public and reinforce the widely held view that they (Members of Parliament and the government in this case) are out of touch with ordinary, hard working people trying to act responsibly in making proper provision for their retirement without having to depend on means tested state benefits.

- The apparent lack of a democratic mandate to introduce the changes. Neither the Conservative Party nor the Liberal Democrat Party 2010 general election manifestos made mention of introducing such measures that represent a major shift in policy resulting in millions of UK citizens in many cases losing many thousands of pounds over their lifetimes. Furthermore, ‘The Coalition: our programme for government’ document says nothing directly on this precise issue. However, if anything the general point made (Section 23: Pensions & Older People) would appear to contradict what the government is actually doing. On the one hand the Government says people deserve dignity and respect in old age that amongst other things means “safeguarding key benefits and pensions” whilst on the other hand actively facilitating the devaluation of pension benefits. Even the ‘triple guarantee’ in respect of basic state pension coming into effect from April 2012 substituting the CPI measure for the RPI measure currently used could in its first year of operation result in pensioners being worse off than under the current system. There is little doubt in our mind that the use of CPI instead of RPI in the triple guarantee is a crude cost cutting measure. Furthermore, the switch to the CPI index for state pensions also lacks a democratic madate – neither of the Coaltion’s partners election maifestos mentioned this detail. It would be reasonable to assume that reference to inflation or cost of living generally meant the existing arrangement of linking increases to RPI.

- The apparent absence of any proper or meaningful consultation prior to the introduction of the changes. Whilst the Pensions Minister’s statement to the House of Commons on 8th December 2010 and the subsequent consultation may have gone some way to addressing various concerns in some schemes, it does not help those schemes the rules of which, for example, make reference to the Pensions (Increase) Act 1971 for dealing with increases. The government needs to take urgent action to protect members of those schemes, the rules of which include reference to the 1971 Act by requiring them to increase pensions in line with RPI. It is clear to us that when the rules of various schemes were drafted RPI was the only widely used measure of inflation and indeed has almost invariably been used. It cannot be right for members of different schemes who have until now had the same percentage increases applied to be treated differently.

- The apparent intention to (mis)use secondary legislation to achieve a major policy objective. Such a major change should only be considered if a government has a mandate from the electorate. Furthermore it should only be introduced through primary legislation with full and proper parliamentary scrutiny and advance consultation that secondary legislation on the whole lacks.

Following detailed consideration of the matter by the Executive Committee in October last year, representations outling these concerns were made to the Pensions Minister who was also made aware of particular concerns relating to the shared cost nature of the RPS. It was disappointing that the Pensions Minister did not respond, but instead the task was delegated to the Department for Work & Pensions’ Correspondence Team whose response addressed none of the specific objections raised and instead spun the generic government line that amongst other things asserted that “the CPI is a more appropriate measure of changes in the cost of living of pensioners than the RPI”. Given the inadequacy of the response and the hundreds of thousands of people covered by the RPS, the General Secretary again wrote to the Pensions Minister asking him for a considered response to the issues raised. The reply this time from the DWP’s Ministerial Correspondence Unit indicated (wrongly) that the matters raised were the responsibility of the Department for Transport for them to deal with. To date no response has been received from the DfT. The Pensions Minister’s failure or reluctance to respond to the matters raised by the the Association and referral to the DfT suggests that other government departments had not been consulted and again demonstrated a lack of thoroughness in policy development, let alone in its implementation.

It will be recalled that members were previously encouraged to raise cocerns with their Members of Parliament. Replies from MPs we have seen on the whole appear to simply regurgitate the government line that CPI is a more appropriate measure of inflation applicable to pensioners.

What can the trustees do about pension increases?

In basic terms the trustees have a legal responsibility to pay the pensions people are entitled to as set out in scheme rules. When it comes to the annual pension increase trustees are bound to do what the scheme rules say. In schemes like the RPS that include reference to the Pensions (Increase) Act 1971 any increase depends on what the government sets out in the associated secondary legislation. RPS and no doubt trustees of other pension schemes affected by this change are aware of its importance and have taken and acted accordingly on the basis of specialist legal advice.

It is now clear that the government’s policy will be implemented. The Pensions Increase (Review) Order 2011 was made on 16th March, laid before Parliament on 17th March and comes into effect on 11th April 2011. It confirms pensions increase in line with CPI (3.1%).

With regard to the RPS, the Trustees have written to all relevant employers seeking their views on supporting an increase of 4.6% (RPI) in April 2011 and changing the rule to introduce a formal link to RPI for future pension increases. The Secretary of State for Transport has been advised of this as franchised passenger TOCs will need to seek his approval before implementing any changes. This is a course of action TSSA would support for schemes generally that are affected by this change.

It is clear to the Association that pension scheme trustees and administrators are not to blame for the current situation. They are in a position where they have to deal with the practical consequences of a seriously flawed and unjust government policy. However, there is little doubt that many employers will warmly welcome this change that reduces pension costs and liabilities.

Surely this change must be unlawful?

Unfortunately not. Whilst from a fairness viewpoint the impact of government policy is immoral and unjust, the prospects of making a successful legal claim to maintain/reinstate RPI indexation are very poor other than perhaps in limited individual circumstances. For the most part, there would appear to be no legal right to have indexation calculated one way rather than another. To have a viable claim members would have to show that an express representation was made to them that indexation would be in line with the RPI and that they relied on that representation. There are two main bases for a person proceeding on these grounds:

- S/he must show that the Government has distinctly promised to preserve existing policy for a specific person or group who would be substantially affected by the change. If so ordinarily the Government must keep its promise.
- S/he also has a case under the European Convention on Human Rights, that the Government has unlawfully interfered with his/her property rights. S/he must show a firmly established expectation that the pension would be increased in line with RPI. Unless s/he can establish that s/he did something relying on a representation, the Government will be able to satisfy the Court that although there has been an interference, it was justified.

In simple terms, the legal hurdle to establish the government was so off the mark and unjustified in making this change is set very high indeed and, therefore, extremely difficult to challenge successfully. It would be easy for the government to line up expert economists to attest using CPI pension increases was fair and reasonable. A comparison could also be made to those European Union member states that have taken action and actually cut pension benefits.

Where a member might be able to demonstrate reliance include:

- S/he purchased added years or additional pension on the basis of a quotation that referred to the RPI and was calculated on the basis of the RPI;
- S/he transferred in a pension from another scheme on the basis of a quotation that referred to the RPI and was calculated on the basis of RPI;
- S/he retired early (or partially retired) on the basis of a statement that the pension would be indexed to the RPI, and would not have done so if the statement had referred to the CPI or some other index.
- S/he has exercised a level/variable pension option (more pension now for less pension when they reach state pension age) when retiring before state pension age, and

These issues were raised with the RPS who were asked how they would deal with such cases. With regard to the first three points above they say that in general, quotations have not specifically referred to RPI. However, if there are specific cases (or groups of members) they understood that account would need to be taken of other communications provided (to members). In relation to the fourth point, the actuarial basis has reflected the rules of the scheme. As increases under the rules (under the Pensions Increase Act 1971) have historically been RPI based, actuarial assumptions were historically linked to RPI.

Clearly this is a complicated issue, but members who believe they have a claim on any of the above grounds should in the first instance raise the issue with their pension scheme – providing copies of any supporting documentation. They should ask for confirmation that RPI increases will continue to apply to the whole of their pension or that part transferred and/or added years purchased.

Who gains from this change?

There are enormous pension cost savings for employers as pension scheme liabilities are reduced significantly. In shared cost schemes like the RPS, contributions of active members should be kept down as a result of the change, but in return for what are likely to be lower pension increases in line with CPI.

The DWP’s own assessment indicates the change to CPI for private sector schemes alone will have a significant impact on members’ benefits, reducing the value of pension rights by as much as £83 billion over 15 years. With regard to the RPS, we have been advised that in terms of the impact on members, it is expected the application of CPI increases in the long term will typically be 0.5% to 0.8% lower than the equivalent RPI rate on average. The TUC calculated that if pensions in payment today had been linked to CPI instead of RPI for the last twenty years they would now be 14% lower.

The 2009 Report and Accounts of the RPS show £648 million was paid in pensions during the year. The difference in applying the relevant CPI (3.1%) instead of the RPI (4.6%) index to 2011 increases would produce a saving of about £9.8 million in one year alone.

Whatever way you look at it there are on-going windfall savings for employers and significantly lower pensions for members. Robert Maxwell swindled 32,000 people in Mirror Group pension funds out of c£400 million. The financial impact of the government’s policy is far larger and more extensive – in practical terms many will rightly see the government’s raid on their pension funds as no different.

How can the link to RPI increases be restored?

From the above it is clear that legal challenges to restore the link to increase pensions in line with RPI are not really viable. The two main options that can work in tandem are:

- Political: Continuing to work with and through organisations like the TUC to lobby government to ensure RPI indexation is restored and properly protected. Members, particularly those living in constituencies represented by Conservative and Liberal Democrat MPs, should continue to put pressure on their MPs to oppose government policy or properly justify the change. Furthermore, if necessary the matter will be progressed through the Labour Party’s policy making machinery for inclusion in the Party’s manifesto at the next general election.
- Industrial: Occupational pensions form part of members’ total employment package negotiated by the unions, the cost of which have been factored into overall cost of settlements over many years. In effect the switch to CPI indexation undermines and devalues such settlements that were entered into on the basis of trust and in good faith. In light of changed circumstances, it is a perfectly legitimate industrial aim to try to restore the value of pensions by seeking to restore RPI indexation or some other form of compensation. Furthermore, for large numbers of TSSA members, their pension contributions have been based on the actuarial assumption RPI inflation pension increases would be applied. In other words they and their employers have paid for something they won’t get in retirement or will no longer receive in the case of those already in receipt of pensions. One way of restoring the status quo is to secure a change of the scheme rules to specify increases in line with RPI. This will need the approval of trustees and employers – in the case of TOC and the 1994 sections of the RPS the permission of the Secretary of State for Transport will also be required. The Association will continue discussing the matter with relevant officials from other unions with a view to progressing the issue with employers.

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Whilst this circular mainly deals with the Railways Pension Scheme (RPS), the same issues are likely to be the case in all schemes whose rules refer to the Pensions (Increase) Act 1971. We are aware, for example, the Serco Final Salary Pension Scheme and some Associated British Ports schemes have been affected. Furthermore, it may be even more confusing because independently of this change brought about by government policy some employers may be proposing changes to their occupational pension arrangements e.g. Thomas Cook and Bombardier. Though even in these cases the government policy has probably acted as a catalyst for changing benefits. Where TSSA is recognised for collective bargaining purposes we should be involved in negotiations/consultations and Senior/Regional Organisers will advise members accordingly.


Communications from pension schemes should be advising members and pensioners of any changes.

Apologies for the length of this article, but in view of the importance and complexity of the issue it was felt necessary to provide members with a comprehensive explanation. Further advice on developments will be issued in due course.

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