DWP Consultation - Pension Schemes permitted to remove indexation

ianthy

So much proposed legislation/changes never makes the headlines... I guess we are all busy with Brexit or Trump, so its a good time to slip out bad news. This article in CityAM today caught my eye. DWP are proposing that Pensions Schemes be allowed to remove indexation.


http://www.cityam.com/259588/possible-changes-way-some-defined-benefit-pensions-indexed

jamesd

Yes, the consultation started on Monday. It's excellent news for those in schemes that are in major trouble because the alternative to switching from RPI to CPI indexation if the scheme fails is the PPF, which means a bigger loss, particularly for those who haven't reached the normal pension age of the scheme.

One measure being considered isn't stopping indexation forever. It's allowing a change from the inappropriate RPI to CPI. RPI isn't appropriate because it includes mortgage costs that aren't normally part of expenses for retirees. CPI doesn't include mortgage costs.

But even that isn't quite right because:

"279.The Government does not think the evidence is strong enough to suggest that indexation should be abandoned or reduced across the board. There could however be a case to suspend indexation in cases where the employer is stressed and the scheme is underfunded. And there may be a case to rationalise indexation arrangements, as the current arrangement where some schemes are prevented from moving to CPI by scheme rules is something of a lottery. ..."

It then goes on to discuss the possibility of schemes being allowed not to make inflation increases if there is a deficit and the employer is stressed. Previously it had mentioned such things as outright cuts to benefits as well.

ischofie1

Good news for those in schemes that are in trouble but not for those whose schemes are not in so much trouble but wish to take advantage.

Thrugelmir

ischofie1 wrote: »

Good news for those in schemes that are in trouble but not for those whose schemes are not in so much trouble but wish to take advantage.

Far better to be proactive than reactive. The PFF shouldn't be the backstop.

Teaandscones

jamesd wrote: »

Yes, the consultation started on Monday. It's excellent news for those in schemes that are in major trouble because the alternative to switching from RPI to CPI indexation if the scheme fails is the PPF, which means a bigger loss, particularly for those who haven't reached the normal pension age of the scheme.

The measure being considered isn't stopping indexation. It's allowing a change from the inappropriate RPI to CPI. RPI isn't appropriate because it includes mortgage costs that aren't normally part of expenses for retirees. CPI doesn't include mortgage costs.

RPI is about 1% p.a. greater than CPI. The main reason for that is the formula effect due to the geometric mean rather than the exclusion of mortgage costs.

If RPI was promised, then RPI should normally be given otherwise it is a straight transfer of wealth from pensioners to shareholders.

The exception to this is where the scheme and its sponsor(s) can't fund the scheme in full. In such a case, if the scheme could stay out of the PPF by moving from RPI to CPI this would (as you state) be good news for pensioners, particularly those who have built up pension rights before 1997 as these are subject to NIL indexation under the PPF.

soulsaver

http://www.cityam.com/259588/possible-changes-way-some-defined-benefit-pensions-indexed

"Trading in an income for life is not something to do on a whim. If you’re thinking of transferring a pension worth more than £30,000 a year, the law requires you to seek financial advice, which can often run into thousands of pounds. But there are some clear advantages"

Doesn't it make you despair?
Financial journonothings...

Sapphire

I'd imagine such an imposition would end up being very much open to abuse. I'd assume, of course, that it would also apply to MPs pensions, and those of public sector workers, since the economy is pretty bust and we need the money for the NHS (etc.).

hyubh

jamesd wrote: »

It's excellent news for those in schemes that are in major trouble

A DB scheme is only 'in major trouble' if it's sponsoring employer is 'in major trouble' and heading for bankruptcy. Until that point pension scheme members are just another set of creditors that the company has contractual obligations to.

because the alternative to switching from RPI to CPI indexation if the scheme fails is the PPF

Fallacy of the excluded middle much...?

It's allowing a change from the inappropriate RPI to CPI. RPI isn't appropriate because it includes mortgage costs that aren't normally part of expenses for retirees. CPI doesn't include mortgage costs.

It's 'appropriate' if the trust deeds say to use RPI.

hyubh

Sapphire wrote: »

I'd assume, of course, that it would also apply to MPs pensions, and those of public sector workers, since the economy is pretty bust and we need the money for the NHS (etc.).

A neat sounding line, and yet the unfunded public sector schemes are directly costed against an estimate of future economic growth.

kidmugsy

Does the Green Paper say that it expects members to get a vote on the decision? Because otherwise it's all just about violating contracts.

jamesd

Teaandscones wrote: »

If RPI was promised, then RPI should normally be given otherwise it is a straight transfer of wealth from pensioners to shareholders.

Use of RPI is just an unmerited and unintended transfer of wealth from shareholders to those in RPI schemes, described as:

"284.There is an argument that if the fundamental nature of the promise that was made to members was to protect them against inflation, then the specification in scheme rules of a particular rate of increase, or a specific index, may have made sense at the time, but may now be anachronistic, and has little to do with the fundamental nature of the promise to protect against inflation."

But even for stressed schemes DWP wrote:

"239.Another approach for stressed employers is to allow reductions in benefits in some circumstances, either by employers and trustees renegotiating benefits at a reduced rate (potentially requiring approval from the Regulator), or by reducing the rate at which deferred pensions and/or pensions in payment increase over time, but allowing the scheme to continue alongside its existing sponsor(s).
240.Allowing even stressed employers to renegotiate pensions and reduce benefits in certain circumstances would be a radical move and highly contentious, as it undermines the nature of the hard promise of a pension as deferred pay. A very high bar in terms of evidence would need to be met before such an approach could be considered. There does not seem to be evidence of a crisis in affordability across the board that would warrant such action. However, some commentators have suggested that in certain circumstances it might be in the interests of both the members (even when the underpin the PPF provides is accounted for) and the employer to consider a renegotiation of the DB promise. A key question here is then when is the risk in the scheme too much for those whose scheme sponsors cannot show insolvency is likely."