The Department for Work and Pensions (DWP) has published responses from the UKpensionsindustry to the consultation on the impact of using the CPI-index as the measure of inflationfor private sector occupational pension schemes payments

DWP published the submissions last week after it received a Freedom of Information (FOI) request on 10 March for hundreds of various company submissions.

The request asked to provide copies of submissions in relation to the consultation, copies of submissions from representative groups of pensioners in schemes run by the list of companies mentioned and copies of submissions made by trade unions representing employees at the companies mentioned.

Companies listed in the FOI include Aviva, BP, BT Group, Barclays, British Airways, Imperial Tobacco Group, Kraft, M&S, Prudential, Sainsbury and Vodafone. However, only twelve parties have responded to the consultation based on the reactions published.

Pension Funds Insider has listed some of the responses to the consultation below.

Q1: The Government welcomes views on whether the impact of using CPI has been correctly summarised.

ABAP, The Association of British Airways Pension scheme members, said: "This section correctly identifies that for historical reasons a few schemes in the private sector have rules which specify pension increases in line with the Pension Increase order. British Airways has two such schemes and together these schemes provide benefits to over 80000 members. It would be very unfair if their accrued benefits were to be increased only by CPI as they are not publicly funded schemes and the resulting saving of £1BN (a conservative assumption made by Towers Watson the scheme actuary) will accrue to IAG shareholders at the expense of the members. Members pensions will be lower on average over their lifetime and so they will pay less income tax and be more likely to claim means tested benefits thus placing more strain on the public purse to benefit a private company. Therefore we submit that some way must be found to remedy this accident of history and to free all private sector schemes from the effect of the change to the CPI in the Pension increase order."

Q2: The Government welcomes views on whether it is right to apply the employer consultation requirements in respect of changes to scheme rules on indexation and revaluation.

The Communication Workers Union (CWU) said: "It is very important that employer consultation requirements are applied in respect of changes to scheme indexation rules. The government's proposals will inevitably encourage some schemes to seek to reduce costs by changing their rules to reflect the changes in statutory indexation and revaluation. As things currently stand changes to revaluation and indexation rules are not 'listed changes' and are therefore not subject to employer consultation requirements.

Given the importance of such changes to pension scheme members' future pension accrual we believe employers should be obliged to consult pension scheme members on any such changes. However, we note the weak nature of such legislation, given that failure to comply with such requirements does not invalidate any rule change. We would like to see more meaningful consultation requirements introduced to better protect the interests of pension scheme members."

Q3: The Government welcomes views on the draft Occupational Pension Schemes (Consultation by Employers) Amendment Regulations 2011.

Whitbread, answering both Q2 and Q3, said: "Whitbread does not agree that changes to the current consultation regime are necessary. As a large and responsible employer Whitbread will consult on all matters of contract with our employees, but a change to benefits that have been established solely because of a legislative requirement and are changing because of a change to that requirement is not a matter for consultation between employer and employee and will only serve to confuse relationships."

Q4: The Government welcomes views on whether there are any issues that should be considered in respect of career average arrangements.

Standard Life said: "There are career average schemes that revalue by reference to the retail prices index. The current tax proposal is however to up-rate the opening value at the start of a pension input period by the consumer prices index for active members rather than the retail prices index. This means extra administration for career average schemes notwithstanding that the retail prices index would have been included in scheme rules before the tax changes were made. Given that this is not required for deferred members, this should be reconsidered."

Q5: The Government welcomes views on whether there are any issues that should be considered in respect of GMPs.

The Committee of Unilever Pensioners (COUP) said: "COUP does not accept that CPI meets the requirement to match "the general level of prices". In particular it excludes costs associated with owner occupied housing and it includes a formula which assumes people trade down to cheaper goods when prices rise. This latter assumption does not take cognoscente of trading down in price often carries the corresponding trading down of quality. Repeated trading down of quality will have adverse consequences on the population."

Q6: The Government welcomes views on whether there is any justification for overriding the rules of private sector occupational pension schemes to impose CPI as the measure of increase in prices.

Capita Hartshead said: "Overriding the rules of the private sector occupational pension schemes to impose the use of CPI as an inflation measure would be one way in which to solve the issue of the lottery of how rules are drafted, and the impact that this has on members. In addition, mandatory adoption of CPI would remove the conflict that may occur for trustees when considering whether to use an amendment power to adopt CPI (see the below point).

"However, we agree that a statutory override is probably not justifiable and again, given the media attention that the issue has attracted, such a move would not be welcomed by the public and would not be good for trust in the pensions industry – particularly as it relates to accrued rights and benefits currently in payment. Trustees and employers should have the flexibility to make choices regarding their own arrangements on revaluation and indexation.

"From an investment strategy point of view, it is noted that there is currently little market for CPI linked assets; were the Government to impose CPI as an inflation measure, the demand for such products would need to be taken into consideration."

Q7: The Government welcomes views on whether there are other reasons why a scheme whose rules do contain a modification power would nonetheless be unable to, or find it difficult to, use CPI for indexation and revaluation.

Aviva said: "Additional reasons for schemes having difficulty in using CPI for indexation and revaluation at a practical level include the lack of availability of CPI based assets and the need to change administration systems and processes to accommodate the change."
Q8: The Government welcomes views on whether it is right to rule out granting modification powers.
The Union of Shop, distributive and Allied Workers (Usdaw) said: "Usdaw agrees with the Government's proposal not to grant modification powers to allow schemes to use CPI instead of RPI. As discussed, we do not believe that such modification powers would be legally enforceable if they are likely to result in members' accrued rights being devalued."

Q9: The Government welcomes views on whether there would be a way to restrict any modification power to those schemes which had previously adopted RPI solely in order to match the statutory minima.

Unite said: "In many cases it would not be possible to determine truly what scheme rules may have said in the absence of legislation. Provision in most cases preceded legislation and in its absence would no doubt have continued to develop or otherwise alternative improvements may have been negotiated. It would neither be practicable or fair to try and implement a modification power which took account of the particular history of different schemes."

Q10: The Government welcomes views on whether you agree the issue of CPI underpins should be addressed.

Prudential UK said: "As stated in the ABI response the potential for a CPI underpin to be required should be avoided at all costs. It is widely anticipated that RPI will exceed CPI the majority of the time and therefore that members in schemes which apply RPI are likely to be better off than those in schemes that apply CPI. At present, under the legislation as drafted, only those schemes which had a clear requirement to apply RPI as at 01 January 2011 will be exempted from the CPI underpin. This should be extended so that schemes which wish to continue to apply RPI (to the benefit of the member) would not need to apply the underpin.

It is also important that the underpin exemption is expanded to cover GMP indexation so that those schemes that do specify Post 88 GMP increases in line with RPI can continue to do so without the need for a CPI underpin.

Currently the legislation also implies that revaluation in deferment can only be applied on an RPI basis if, prior to the change, the whole pension, including any GMP benefits, were revalued in line with RPI. This means that, without any further amendments to the Pensions Bill, there will be instances where the CPI underpin will need to be applied to revaluation in deferment."

Q11: The Government welcomes views on whether there are any other options to address the CPI underpin issue.

Whitbread said: "Whitbread agrees that this would address the CPI underpin issue for increases to pensions in payment, but would remind Government that the underpin issue also needs to be addressed for increases to pensions in deferment."

Q12: The Government welcomes views on whether the proposed amendments to remove references to RPI from primary legislation are satisfactory.

Unison said: "The proposed changes to primary legislation go beyond the principle purpose of the consultation document, which is to consider the impact of using CPI as the measure of price increases for private sector occupational pension schemes. As we have explained in our response UNISON does not accept a move from RPI to CPI."

The British Air Line Pilots Association (BALPA), released a statement to the DWP instead of answering the questions. One comment from their statement said: "BALPA welcomes the decision not to enact legislation that would override scheme rules in respect of RPI and urges the Government to maintain its position in the face of any lobbying to reverse it."

To view the entire response to the Freedom of Information Request, click here.

azeevalkink@wilmington.co.uk

First published 22.07.2011