Gold-plated pensions lose shine

Moira O'Neill

Gold-plated pensions lose shine

Big trades unions might be tearing into the government about cuts to public-sector pension benefits - but the political party they fund is doing exactly the same. Labour's latest accounts show that the party has saved £4.2m by switching the inflation rate used in its pension scheme from the retail prices index (RPI) to the lower consumer prices index (CPI).

The party is not alone. According to a report by the Association of Consulting Actuaries (ACA) around a fifth of surviving private sector final-salary pension schemes have slimmed down benefits by switching from RPI to the lower CPI inflation measure.

A move to CPI is commonly applied to the pension pots of employees who have left the company but kept their pension rights in place, and to the incomes of employees who have retired.

The advantage to employers responsible for paying pensions and benefits is that CPI inflation rises more slowly than RPI inflation (see table below) - so they'll save money.

However, it disadvantages members of the pension scheme as they receive progressively lower benefits over time. Over the 10-year period from the start of 2002 to the end of 2011, £1,000 indexed in line with CPI would have grown to £1,270. But the same £1,000 indexed in line with RPI would have grown to £1,358, a difference of £88 – almost 7 per cent.

Retired members receiving their pensions are often subject to a much higher rate of inflation than CPI. Alliance Trust has calculated that those aged 65-74 have inflation rates of 5 per cent and over.

What recourse do disgruntled employees have? Breach of employment contract is probably not an option, as most contracts simply refer to pension provision in broad terms.

Your pension scheme rules may have been drafted many years ago, specifically referring to RPI indexation. So request a copy of the pension scheme rules to check, although don't be surprised if the scheme rules refer to 'inflation' rather than a specific index.

The government has not yet legislated to override the rules of private sector pension schemes to apply CPI instead of RPI indexation. However, pensions partner David Hosford at Pitmans Solicitors says pensions law requires employers that wish to change their scheme's rules to apply CPI revaluation to undertake a 60-day statutory consultation process first. Nevertheless, even if employees object strongly, the employer can still change the scheme.

The agreement of your scheme's trustees may also be needed under the scheme's amendment power. So if your employer is seeking to reduce benefits, it could be worth asking the pension trustees whether they are satisfied as to the validity of and need for the change.

This raises the important issue of the independence of the pension trustees. Often, they are employees who may not fully appreciate the onerous nature of the obligations they are accepting and in particular that they must act independently of their employer for the benefit of the pensioners.

However, be prepared for trustees to be won over with the employer's argument: "Accept slimmed down benefits or the scheme will close". Inevitably, slimming down of private sector workplace final-salary pensions will continue, eroding the assumption that these 'gold-plated' schemes are the best type of pension a worker can get. Examine your benefits carefully.


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