Employees must be consulted in advance before pension scheme measure of inflation can be changed

Out-Law News | 14 Mar 2012 | 9:20 am | 1 min. read

Employers with occupational pension schemes will have to consult with affected employees in advance if they want to change the measure of inflation used to calculate the value of benefits.

New regulations laid before Parliament have introduced a 'listed change' meaning that an employer must consult with active and prospective pension scheme members if it wishes to change the rate at which pensions in payment under an occupational scheme are increased, or deferred pensions or other benefits payable under the scheme are revalued.

However, the requirement only applies where the change would, or would likely, make benefits less generous to all pension scheme members or members of a particular description.

Occupational defined benefit pension schemes must increase pensions in payment and revalue deferred pensions by a minimum amount each year to allow for inflation. The Government replaced the Retail Prices Index (RPI) with the Consumer Prices Index (CPI) as the statutory measure for determining general price increases in 2010. CPI has been used as the measure of inflation in public sector pensions since 6 April 2011. Six trade unions are currently trying appeal against the legality of that move in the Court of Appeal.

Both CPI and RPI are used to calculate the general percentage change in costs over the course of a year with reference to a fixed 'basket' of goods and services. However as the formula for calculating CPI includes the spending behaviour of people who might switch to cheaper alternatives as prices increase, including pensioners and students in halls of residence, it is broadly speaking a lower percentage than RPI. CPI also does not include changes to the cost of housing, including mortgage payments and council tax.

In 2010 the Department for Work and Pensions (DWP) consulted on the impact of switching to CPI as the measure of inflation in private sector pension schemes where RPI was not “hard wired” into the scheme rules. However, it stated that it would not change the law to allow schemes that would not otherwise be able to do so to take advantage of the lower rate. At the time, it estimated that up to 80% of schemes would be unable to make the switch.

Companies with at least 50 employees that want to make certain changes to their future pension arrangements must consult fully with affected staff and their representatives before making those changes. These 'listed' changes are actions that are deemed to go against the Occupational and Personal Pension Schemes Regulations and include actions such as increasing the normal pension age, closing the scheme to new members or increasing the rate of member contributions. The Pensions Regulator can issue a fine of up to £50,000 on employers who do not consult.

Employers will not need to consult scheme members if they notified those members of a proposal to change the measure of inflation before 6 April 2012.