Discreet sheep, John Gotti and the CPI/RPI Debate

Neil Copeland

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 “We are discreet sheep; we wait to see how the drove is going, and then go with the drove.” So wrote Mark Twain.

This quote came back to me as a succession of lawyers responded to my request for advice for trustees on the impact of the ministerial “statement of intent”, as it is referred to by m’learned friends, made on 12 July 2010 this year. The statement  confirmed that the move to use CPI as the measure of price inflation applied to the private as well as the public sector and would take effect from 2011. As we have commented previously this has the potential to have a significant impact on schemes.

“Wait and see” seems to be the slightly ovine consensus view of the legal profession on the CPI/RPI question.

Now “wait and see” can be a completely valid response to certain situations and one can always point to situations where one or other of the protagonists would have benefited, with hindsight, from a “wait and see” approach. No one is going to dispute that Lord Cardigan, and indeed the whole Light Brigade, would have been better served had they waited to see whether or not they fully understood Lord Raglan’s order before commencing their magnificent but doomed assault on the Russian guns.   And clearly, the goalie in the attached video link should have waited to see where the ball eventually ended up before celebrating his tremendous “save”.  (It really is worth sticking with it, past the tacky Panasonic ad!)

But I’m left puzzled by what we are waiting to see as regards CPI/RPI – I fear it may be the Emperor’s new clothes.

Let’s focus on revaluation, the increases which are to apply to a members benefits between the date their pensionable service ends and their normal retirement date. To keep things simple let’s forget about contracting out and GMPs.

The factors used to revalue a members non-GMP benefits are set out in annual Occupational Pension (Revaluation) Orders (“Revaluation Orders”). These Revaluation Orders are made under Schedule 3 to the Pension Schemes Act 1993 (“the Act”). Paragraph 2 (4) of the Act states the following:

“The Secretary of State may estimate the percentage increase mentioned in sub-paragraph (3)(a) in such manner as he thinks fit.”

So it would appear that no primary legislation is necessary in order for the minister to use CPI for Revaluation Orders. In fact the minister would appear pretty much able to use whatever he likes. From what I have read there is no intention to apply CPI retrospectively, a concern expressed by some commentators.

The Revaluation Orders are published in mid-December each year and are applied for the following calendar year, So trustees, are required to use the factors derived from the Revaluation Order published in mid-December 2010 for deferred members retiring from 1 January 2011 onward.

Essentially all the annual December Revaluation Order does is apply an increase to the previously used factors. If the minister is true to his word, and I can think of no reason why he wouldn’t be, in December 2010 he will uprate the factors to be used for 2011 by CPI rather than RPI. I suppose there is a chance that he will not actually use CPI in December, but I think this is extremely unlikely, given that CPI will be used in the public sector and the unions, whilst not exactly welcoming the change, have used it to argue that public sector pensions are made more affordable.

So the question that trustees need answered is:

If the minister uses CPI to derive the uprated factors published in the December 2010 Revaluation Order, can I use these to revalue deferred pensions in my scheme?

Trustees do not need to wait until the Revaluation Order is published to see what the answer to this question is. Clearly the question posed above has only 2 possible answers “yes” or “no”. If the answer is “yes” then I believe the trustees can carry on as present and rely on the statutory orders – there has been no amendment to the scheme rules, or members benefits, nor is there any need for one.

If the answer is “no”, as it will be in some cases, such as those schemes which have hard coded RPI into the rules, then leaving this question until the Revaluation Order is published in December will leave very little time to decide what the trustees need to do if they can’t simply use the statutory order. Especially when you factor in Christmas and New Year holidays. They are going to have to know how they will administer their schemes from 1st January 2011.  Trustees will either have to specify a scheme specific set of revaluation factors or, if possible, amend the scheme. There does seem to be an expectation, though I’m not sure how well founded it is, that the Government will announce some sort of overriding legislation to allow schemes that cannot automatically benefit from the announced change to implement it by means of some simplified approach. But this shouldn’t prevent trustees seeking to understand what their position is at this time.

I wouldn’t usually recommend trustees take advice from a mafia don, at least not unless they had duly appointed him under  Section 47 of the Pensions Act 1995, but I am reminded of John Gotti, the New York crime boss who quoted an old Italian proverb to the effect that “E’ meglio vivere un giorno da leone che cent’anni da pecora”, usually translated as, “It is better to live one day as a lion than a hundred years as a sheep”.

 Trustees, roar a little!  Ask your legal advisers the above question – and tell them you’d rather not “wait and see”.

Neil Copeland

Post by Neil Copeland

Director, pensions consultant and adviser to trustees and employers on all aspects of work based pension schemes.