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Home | News & events | Legal updates | CPI, SPA, default retirement age: Ones to watch in the coming months
CPI, SPA, default retirement age: Ones to watch in the coming months
20 July 2010
The Government has announced it will change the basis on which private sector pensions will be required to be increased.
From next year, the basis on which schemes are required to increase pensions in payment, deferred pensions and GMPs, will be determined by reference to the Consumer Prices Index (CPI) rather than by reference to the Retail Prices Index (RPI).
This follows a similar announcement made in relation to public sector pensions in the post-election Budget.
The Government has now announced that from 2011 Revaluation Orders (the method by which the statutory level for pension increases are announced) will be based on CPI rather than RPI. This basis of measuring inflation is likely to result in lower increases being applied. The first revaluation orders on the CPI basis are due to be published in October/November 2010.
For many schemes, this change is likely to apply automatically. However, it will be necessary to check scheme rules to be sure whether or not this will be the case. Where a pensions in payment rule or a revaluation in deferment rule refers specifically to the relevant legislation without incorporating the text of that legislation, it is likely that the change will be automatic.
However, where a scheme's rules have incorporated specific references to the basis on which increases or revaluation are to be applied, it is likely that rule amendments will be necessary to effect a change to CPI.
Where rule amendments are needed, it is likely to mean that change will only apply to pensionable service completed after the date of that change, and not in relation to any benefits already earned within a particular scheme.
Additionally, trustees and employers should also give careful consideration to whether to apply CPI to those benefits not subject to statutory increases, if there is flexibility within scheme rules to do so.
Additionally, the Government has announced a number of other matters for review, including:
- acceleration of the increase to State Pension Age
- review of the default retirement age
- review of the annual allowance
State Pension Age
It was announced in the post-election Budget that the increase to State Pension Age (SPA) would be accelerated so that it would increase to age 66 earlier than previously anticipated. Currently there is legislation providing for an increase in SPA to 66 from 2024.
This will be of particular interest to pension schemes that provide bridging pensions offering a higher pension to members before SPA than after SPA. It may also be of interest to any employers considering making changes to pension scheme benefits, particularly, any employers considering future changes to normal pension age.
The Department for Work and Pensions has asked for evidence on when SPA should increase to 66. Areas where they have asked for evidence include:
- what evidence of longevity (and the financial crisis) should be sought
- period of notice people should be given to allow them to plan ahead
- evidence to ensure there is fairness for those who ‘benefit’ from the change and those who pay for it
The call for evidence closes on 6 August 2010.
Default retirement age
The Government also announced that it would be reviewing the default retirement age of 65. Currently it is not a breach of age discrimination legislation to retire someone at age 65, provided proper procedures are followed. This default retirement age has been the subject of an unsuccessful challenge in the courts.
The Government is looking at phasing out default retirement age from April 2011.
Annual allowance
The Government has also said that they would review the annual allowance. This could result in a reduction in the level of savings into pension schemes that is tax free.
Implications for employers and trustees
For employers and pension scheme trustees, these proposed measures give rise to the following questions:
- Will the switch to CPI apply automatically?
- Should there be any change in the scheme's normal pension age to allow for the SPA increasing?
- Will the SPA increase result in bridging pensions being paid for longer?
- How would abolition of a default retirement age affect the concept of Normal Retirement Date in a pension scheme
- What effect will restrictions on the annual allowance have?
For more information on how these changes will affect you, please contact David Thompson or your usual pensions contact.
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David Thompson
Partner
T: 03700 86 8400
I: +44 (0)1908 48 8400
E: david.thompson@shoosmiths.co.uk