DWP Consultation - Pension Schemes permitted to remove indexation

kidmugsy

PensionTech wrote: »

Actually, stopping indexation forever is being considered, because one of the consultation questions refers to statutory indexation rather than CPI. The importance of this is outlined in the consultation itself. The statutory minimum increase for pre-97 excess is nil.

Is the proposal to force that change on pensions in payment, or only on pensions awaiting payment?

jamesd

PensionTech wrote: »

Actually, stopping indexation forever is being considered, because one of the consultation questions refers to statutory indexation rather than CPI. The importance of this is outlined in the consultation itself. The statutory minimum increase for pre-97 excess is nil. Yet 79% of schemes pay increases of some form on pre-97 excess, whether those are RPI, CPI or some fixed rate. The estimated saving from switching RPI indexation to CPI on benefits is 5-10%; the estimated saving from switching down to statutory, including nil on pre-97, is 15-20%.

Close, but not quite right. Question 4 actually asks:

"g) Is there any evidence to suggest that there is an affordability crisis that would warrant permitting schemes to reduce indexation to the statutory minimum?"

Saying it's being considered for schemes not in trouble is going too far, given that paragraph 279 which I quoted earlier begins "The Government does not think the evidence is strong enough to suggest that indexation should be abandoned or reduced across the board." Both in the question and the discussion it's made abundantly clear that the government doesn't think that there is sufficient reason to do it, but asking whether anyone has evidence to contradict their view seems sensible.

Since most here probably won't even look at page 63 here's the breakdown:

21% no increase, same as PPF
21% fixed, up to 3%
10% fixed over 3%
8% CPI
40% RPI


Reducing troubled schemes to the PPF no indexation pre-97 but avoiding a 10% PPF benefit cut and the PPF cap would be an improvement for members if the alternative is the PPF.

PensionTech

The government is not inclined to do either, but it does ask for submissions, and the question doesn't appear to differentiate between crystallised and uncrystallised benefits (and I don't see a particular reason why that line would be drawn).

Here's a couple of relevant fragments:

273. Various commentators have suggested that indexation should be cut to reduce the burden on employers, either by allowing all schemes to reduce indexation to the statutory minimum, or to allow those schemes (around 75%) which have RPI written into their scheme rules to move to the currently lower CPI measure.

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.

g) Is there any evidence to suggest that there is an affordability crisis that would warrant
permitting schemes to reduce indexation to the statutory minimum?

Edit: This was in response to kidmugsy's post - I cross-posted with jamesd.

To jamesd: yes, agreed. Though it does, as you mentioned at the beginning of this thread pose a stronger question in asking "Should the Government consider allowing schemes to suspend indexation in some circumstances?" which is exactly the same phrasing as the RPI to CPI question, possibly indicating that they see this as similarly viable.

jamesd

kidmugsy wrote: »

Is the proposal to force that change on pensions in payment, or only on pensions awaiting payment?

Neither. It's to ask whether anyone has evidence to contradict the government's view that it isn't appropriate to do it for all schemes.

In an avoid the PPF situation the trustees and their advisors would have to work out what is needed to avoid the PPF and that could be either or both sides. But I doubt that pensions in payment would be used. Before or after the scheme's normal pension age seems more likely.

At the moment the trustees normally don't even get the option. It's insurance company buyout that's almost certain to be unaffordable or the PPF with no middle ground.

There's an alternative that's only available within twelve months of likely business failure and part of the consultation is over whether that should be changed, perhaps to give trustees the option to run the scheme without an employer, to avoid the PPF, but still with PPF backstop.

jamesd

PensionTech wrote: »

To jamesd: yes, agreed. Though it does, as you mentioned at the beginning of this thread pose a stronger question in asking "Should the Government consider allowing schemes to suspend indexation in some circumstances?" which is exactly the same phrasing as the RPI to CPI question, possibly indicating that they see this as similarly viable.

Not really. I think that is more about:

"280.One suggestion is that increases should be conditional on the scheme and the sponsor having the resources to make the payments – so that no increases would be paid, for example, if the scheme was in deficit and the sponsor was unable to make up the deficit, and the trustees were satisfied that the best interests of members would be served by suspending indexation to allow the employer to strengthen its corporate finances. Increases could be restarted in future years once the employer had recovered. The Work and Pensions Select Committee in their recent report recommended permitting trustees to propose changes to scheme indexation rules, in the interests of members."

I think that suspensions of that sort would be a useful option for trustees to use, in preference to a forever timespan.

Indeed, the drawdown rules that I intend to use will stop indexation increases for me at times, so I don't think that's inherently bad.

One other issue that is clearly recognised is the broad extent of moral hazard issues around all of this, with members, trustees, employers, executives at employers (perhaps rewarded by share options or punished by share volatility), professional advisers and even accounting standards all presenting moral hazard issues.