Indexation and revaluation
Section 19: Indexation and revaluation
111.Section 19 amends four provisions concerning the indexation of defined benefit pensions in payment and the revaluation of the deferred pensions of early leavers from occupational pension schemes following the Government’s decision to use the CPI as the measure of increase in the general level of prices in place of RPI.
112.Subsections (1) to (3) amend section 84 of the PSA 1993 so that schemes which provide full uncapped revaluation of deferred members’ preserved pensions (including GMP rights) may do so without reference to the statutory revaluation requirements contained in section 84 provided they maintain (in the opinion of the Secretary of State) the value of pensions by reference to the rise in the general level of prices in Great Britain.
113.Subsections (4) to (6) provide for a new method of calculating revaluation additions by inserting a new paragraph 2A into Schedule 3 to the PSA 1993. The new method is the same as the existing statutory method for final salary schemes, but allows schemes to continue to calculate the revaluation addition as if the annual revaluation order was still calculated by reference to RPI. This means schemes that continue to mirror the statutory revaluation method but use RPI as the inflation measure would not also have to consider the statutory revaluation addition calculated using CPI. This new method is only available where the scheme rules require it.
114.Subsections (7) and (8) amend section 51(3) and 51(4) of the PA 1995 to allow schemes to continue increasing pensions in payment under provisions in scheme rules rather than under the statutory requirement contained in section 51(2). In place of increasing by reference to the RPI, schemes will be able to increase by RPI, the CPI or a combination of the two, depending on the rules of the individual scheme. Where schemes continue to increase pensions by RPI and have done so continuously from January 2011 (or when the pension first comes into payment if later), the amendments will ensure they need not carry out an annual comparison of the RPI under scheme rules and CPI under the statutory requirements and pay the higher of the two. This provision continues to apply in situations where members transfer from a scheme that has paid RPI based increases from January 2011 to another scheme that continues to pay RPI based increases.
115.Subsections (9) to (11) amend section 40(1) of the WRPA 1999 to allow the Secretary of State to prescribe that (as a minimum) pension credit benefit (arising from a pension share on divorce) paid by an occupational pension scheme must be increased by reference to the percentage increase in the general level of prices determined by the Secretary of State for the purpose of the statutory revaluation requirements.
Section 20: Pension compensation: annual increases in periodic compensation
116.Section 20 amends Schedule 7 to the PA 2004 and Schedule 5 to the PA 2008. The section removes references to the RPI when calculating indexation increases for pension compensation paid by the PPF. The reference to a specific inflation measure is replaced by a reference to the general level of prices in Great Britain.
117.The section enables the Secretary of State to decide, as the Secretary of State thinks fit, the manner in which percentage increases in the general level of prices are to be determined for this purpose (for example, by reference to CPI) and requires the Secretary of State to publish any such decision. As a result of these amendments, a redundant definition of RPI is omitted from the PA 2004.
Section 21: Indexation requirements for cash balance benefits
118.Section 21 removes the requirement for cash balance benefits to be indexed under section 51 of the PA 1995.
119.Cash balance benefits are benefits which the member accrues in the form of a lump sum or fund, the level of which can be determined in advance, is guaranteed to reach a particular minimum, or is determined by the application of a notional accrual rate or rate of interest. The fund is then used to buy an annuity or to provide a pension from scheme funds.
120.Current legislation requires that members with cash balance benefits buying or receiving an annuity or being paid a scheme pension must receive Limited Price Indexation. This means that pensions or benefits in relation to accruals between 1997 and 2005 must, once section 19 is brought into force, be indexed to at least the lower of CPI or five per cent and pensions or benefits in relation to accruals post 2005 must be indexed to at least the lower of RPI or 2.5 per cent.
121.Pensions or annuities already in payment prior to this section coming into force will continue to be indexed and will not be affected by the changes in section 21. This section also does not apply to cash balance benefits under any scheme which is or has been contracted-out by virtue of satisfying the requirements of section 9(2) of the PSA 1993 on or after 6 April 1997, for as long as accrued rights or pensions attributable to a period of contracting-out are retained within the scheme.
122.Section 21 therefore also ensures that the relaxed indexation requirement does apply to schemes which were contracted out on a guaranteed minimum pension basis prior to 6 April 1997. It is not necessary to exclude such schemes from this relaxed requirement, because there are separate indexation requirements for guaranteed minimum pensions.
123.The indexation requirements are not relaxed for career average schemes or schemes which promise a guaranteed rate of conversion of the accrued ‘pot’ to a rate of pension. Section 51ZB(6) ensures that schemes offering pension commencement lump sums or survivors’ benefits of a set percentage of the member’s benefit are not excluded from the definition of cash balance schemes for the purposes of this easement.