The Government’s proposed shift from RPI to CPI could see employer costs increase for three in five schemes, warns Aon Consulting.

The employee risk and benefits management firm said that 58 per cent of schemes in a survey of 80 are required by their rules to increase pensions in payment by reference to the RPI, and 15 per cent carry this restriction for deferred pensions.

These schemes will be unlikely to take advantage of the new legal minimum as existing pensions legislation prohibits them from simply switching to CPI. If such legislation is not changed, Aon said CPI will become the new legal minimum and pension schemes will effectively find themselves required to award the higher of the two measures – RPI by the scheme rules, and CPI by the legislation.

Aon welcomes the proposals overall, but said the impact of the changes could vary depending on the wording of scheme rules. The Government should consult thoroughly with the industry prior to the implementation.

The firm also found that 79 per cent of schemes define deferred increase by reference to the legal minimum, and 20 per cent define pension increases in payment by reference to the legal minimum. These schemes, Aon said, are likely to change to CPI indexation by default.

Twenty-two per cent of schemes link pensions in payment to RPI, but have the option of selecting an alternate measure if the Trustees and/or Company so determine. These schemes must consider how to react to any change.

“Overall we believe that CPI is a more appropriate measure of inflation than RPI when considering pension increases, and combined with the fact that many schemes remain under substantial financial pressure this has to be a welcome move,” said Paul McGlone, principal and actuary at Aon Consulting. “However, the success of such reform will hinge on the legislators’ understanding the implications for every kind of scheme, and ensuring that schemes are not left out simply because they have a particular type of wording in their rules.”

McGlone warned that even if the legislation is enacted “thoughtfully, there will remain challenges”. He said this is the only example of pensions legislation which has acted to reduce private sector pension benefits retrospectively. “Schemes may therefore be cautious in making these changes, and will want to ensure that they avoid legal action being taken by their members.”

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