By Matt Ritchie
Pensions Minister Steve Webb has confirmed in a speech that the Government plans to start consultation on the switch from the retail price index (RPI) to the consumer price index (CPI) as an inflation measure for private sector pensions tomorrow.
Consultation will outline the way the Government thinks schemes with the RPI benchmark ‘hardwired’ into their rules will be affected, and how to deal with years in which RPI is higher than CPI.
Webb also said the Government will tomorrow publish its annual revaluation order, which sets out the minimum rate at which occupational pension schemes should revalue deferred pension rights and pay increases on pensions in payment.
Speaking at the National Association of Pension Funds (NAPF) annual trustee conference in London, Webb stated that once the Chancellor of the Exchequer determined that social security benefits were to be linked to CPI in the emergency budget, ‘the dye was cast’ that CPI would be used as the inflation measure for pensions.
CPI was considered an appropriate measure for two reasons, Webb said. First, CPI is the measure the Bank of England uses to benchmark the entire economy.
“Second, particularly when you’re thinking about pensions, you want a basket of goods that is appropriate to the people whose benefits you are indexing and revaluing. And, the RPI in recent years has been very volatile, and it has been dominated by switches in mortgage interest rates, yet only seven per cent of pensioners have an outstanding mortgage,” Webb said.
The Government anticipates CPI will be around one per cent lower than RPI over the long term, with the difference principally due to the way CPI treats changes in consumer behaviour in response to price increases.
While the switch to CPI as the inflation measure will see pension benefits growing more slowly, Webb said this will be partially offset by the restoration of ‘earnings link’.
From next year, the State Pension will once again be linked to earnings. Webb said that while the circumstances dictate that people will need to work longer and draw pensions later, the Government is committed to ensuring that pensions are ‘worth taking’ when they are drawn.
“So although CPI will have a downward effect on long term occupational pension income, earnings link on the basic pension will have a substantial upward impact and it’s important to see the two together,” Webb said.
The CPI switch will also reduce the regulatory burden on the sector, Webb said. The Minister is a member of the Government’s ‘Reducing Regulation Committee’, and in his speech referred to the ‘one in/one out’ principle, whereby every additional pound of regulatory burden imposed by the State must be met by an equivalent reduction.
When asked by NAPF chief executive Joanne Segars what burdens had been reduced in response to the additional regulations being imposed on the industry, Webb offered the CPI switch.
“In terms of the burden on business of what the DWP does, auto-enrolment is a big ‘in’, CPI is a big ‘out’,” Webb said.
The Minister added that new, simpler information disclosure requirements introduced at the start of this month would also make it easier for those who run schemes. In addition, work is being done on provisions in existing legislation in order to make it easier and cheaper to administrate.
The move has been criticised from some quarters for reducing benefits that pensioners had been expecting many years in advance of the change.
In response to an audience question on the issue, Webb responded that the Institute for Fiscal Studies had determined that RPI may overstate inflation, and said there is economic evidence that CPI is an ‘entirely credible, plausible basis on which to measure inflation’. Further, where RPI is not explicitly referred to in a scheme’s rules a change in the inflation measure was always possible, Webb said.