On 8 July the Minister of State for Pensions, Steve Webb MP, made a Written Ministerial Statement to Parliament which announced the Government’s intention to move to using the Consumer Price Index (CPI) as the measure of price inflation for the purposes of regulating occupational pension schemes. A statutory minimum requirement will continue to apply to the revaluation and indexation of pension rights.
The proposed changes will affect how many deferred pensions are revalued in future, and how pensions in payment are increased. The changes apply to defined benefit rights in occupational pension schemes, and certain defined contribution rights in occupational pension schemes. The changes will affect the statutory minimum requirement for revaluation and indexation; occupational pension schemes will still have the freedom to pay more than the statutory minimum.
In broad terms, a revaluation order is made each year which sets out the minimum rate at which occupational pension schemes should generally revalue deferred pension rights and pay increases on pensions in payment.
For deferred pension rights, the order tabulates an overall revaluation percentage relating to each possible number of complete years between the end of someone’s pensionable service and their normal pension age. The order that is in use for any year will use data on price inflation up to September of the previous year. For example, the order in use for 2010 uses data on price inflation to the year ending 30 September 2009 based on RPI. The order which will be in use in 2011 will use data on price inflation to the year ending 30 September 2010 based on CPI. The overall percentage that will apply to deferred pension rights which have been deferred for at least two complete years, where the relevant years straddle the change from RPI to CPI, will therefore be calculated as a combination of percentages based on RPI and then CPI.
The order in use for 2011 will also be used to calculate annual increases on pensions in payment for 2011, and these will be in line with CPI. The Government expects to publish the order in November or December 2010.
The Government will bring forward legislation at the earliest opportunity to ensure that other references to price inflation in pensions law are consistent with using CPI as the measure of price inflation from 2011 or as soon thereafter as Parliamentary time allows. For example, the Guaranteed Minimum Pension Increase Order that will come into effect in 2011 will be made on the basis of the CPI figures for the year to 30 September 2010.
The following generalised simplified examples are provided for illustrative purposes only.
These examples illustrate how these changes could apply to future calculations of the revaluation and indexation applying to pension rights, if a pension scheme adopted the statutory minimum approach. They would not affect pension payments already received. They do not deal with issues arising from contracting out from the State Second Pension. The detailed rules on revaluation and indexation vary between pension schemes and can be higher than the minimum. They also depend on when the pensionable service took place. Other factors may affect an individual’s pension entitlement depending on that scheme’s rules.
- A is a pensioner member of a pension scheme. His pension has been in payment for three years, and he has been receiving increases related to RPI. From 2011 his future increases will be calculated in relation to CPI. This does not affect his previous increases.
- B is a deferred member of a pension scheme. She left pensionable service five years ago. When she reaches normal pension age, her rights will be revalued in relation to RPI in respect of the first five years after she left pensionable service, and then in relation to CPI until normal pension age. Once her pension has been put into payment, she will receive annual increases calculated in relation to CPI.
- C is an active member of a pension scheme. He is continuing to accrue new rights. If he continues in pensionable service until he reaches normal pension age in (for example) 2015, revaluation will not apply. Once his pension is in payment, he will receive annual increases calculated in relation to CPI.
- D is an active member of a pension scheme. She will leave pensionable service in 2013, and will reach her normal pension age in 2020 and begin to receive her pension at that time. From 2013 to 2020 her rights will be revalued in relation to CPI. Once her pension is put into payment, she will receive annual increases calculated in relation to CPI.