Government Needs To Provide A Statutory Override Of Indexation For All Occupational DB Pension Schemes

Pension lawyers at Irwin Mitchell call for a re- think about how pension funds are indexed to cope with inflation- in the light of how many private companies are still struggling with their pension fund obligations.

Penny Cogher, a pensions lawyer in Irwin Mitchell's  London team points out that generally the UK has moved to using CPI indexing, as opposed to the higher RPI Indexing when calculating inflation proof rises.  MPs on the Parliamentary Treasury committee are also calling for a move away from using RPI  for "any indexation purpose where legally possible" following the government conceding that the RPI index, which was de-recognised as a national statistic in March 2013, can be unfair on businesses. 

Currently many UK occupational defined benefit (DB) pension schemes are tied to RPI indexation rises, which at 3.9% is substantially higher than CPI at 3%. This puts more pressure on businesses to meet their pension fund obligations, at a time when many are already under pressure. This pressure has led some companies to try to swap to CPI indexing,  but have been unable to do so because of the precise wording of their rules. Recently BT was blocked by the High Court from changing the indexation of the third section of its DB scheme because RPI had not been deemed 'inappropriate' as the rules demand, and so losing the opportunity to benefit from huge savings. Barnado is set to save £36 million if it succeeds in its challenge on this in the Supreme Court this year. By contrast the Government itself switched its public sector pension schemes to CPI indexation from April 2011.

Expert Opinion

"It seems incongruous to have one rule for public sector pension funds and another rule for many company DB schemes, purely because of the precise wording of their rules. If the Government is serious about helping British companies, it should surely insist on a standardized approach and provide a statutory override of indexation for occupational DB pension schemes. The Government admitted RPI was out of date when in last November’s Budget it announced that business rate rises would be linked to CPI, not RPI as previously, following pressure from industry lobbies. It's time the pensions industry also put on this pressure so we don't see a repeat of the some of the enormous pension fund disasters that we've seen with companies such as Carillion, for whom meeting their pension fund obligation has proved to be yet another nail in the coffin." Penny Cogher - Partner