The changeover from using the Retail Price Index (RPI) to Consumer Price Index (CPI) as a measure of price inflation for regulating occupational pension schemes, is “grossly unfair”, says AWD Chase de Vere.

Technical pensions director, Param Basi, said the move is unfair to those who have contributed in good faith towards their retirement, but will not see a change in the measure by which their retirement income will increase.

“The argument that CPI is a more appropriate measure does not stand up when you consider that pensioner inflation is recognised as being higher than RPI anyway,” Basi said. “This change will have a double whammy impact on pensioners’ real incomes.

“For schemes which reapply revaluation and pension increases by reference to legislation the change could be quite straight-forward, although consideration will also need to be given to the wording of employment contracts. However, for other schemes which refer specifically to RPI, the position is more complicated.”

Basi said some members will be at the mercy of scheme trustees, who will be able to show their true colours in terms of whether they act or the members or the employer.

Meanwhile, KPMG’s UK arm has found that the change can also affect those with deferred pensions, and current pensioners, with the impact anticipated to affect 80 per cent and 20 per cent respectively.

According to KPMG, 80 per cent of deferred pensions will have their entitlements revalued according to CPI up to the individual’s retirement.

For current pensions, 20 per cent will be impacted with an increase based on CPI indexation in the future. Here, KPMG said there is some bias towards larger schemes so more than 20 per cent of pensioners could be affected.

“As we said last week, it’s a small print lottery as to how schemes are affected,” commented Mike Smedley, pensions partner at KPMG in the UK. “If RPI is specifically cited in the scheme rules, our understanding is that this will remain the case – even if RPI was only introduced to meet the government’s requirements at the time. If the rules do not specify which measure to use, or simply refer to the prevailing legislation, then it will be CPI.”

KPMG estimates that these changes could amount to a reduction in private sector pensions deficits of around £45bn.

However, Sacker & Partners LLP partner, Andrew Bradshaw, said Steve Webb’s recent statement could lead to a nasty surprise for employers with RPI pension increases enshrined in their scheme’s governing documentation.

For these schemes, members’ pensions are likely to increase by RPI in line with the scheme’s trust deeds and rules going forward. However, unless the government specifically sets out rules for these schemes, from 2011 members could also enjoy an additionally CPI ‘statutory underpin’, meaning that should CPI exceed RPI in any particular year, members’ pensions would increase in line with CPI.

“Whilst most analysts expect CPI to generally be lower than RPI over time this is not set in stone for each particular year. There is therefore the bizarre prospect of some pension scheme members enjoying a benefit improvement if CPI were to exceed RPI in a particular year – probably not what most employers or the government were expecting!”

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