How to avoid member complaints over RPI-CPI switch

Updated July 2011

Since the government’s announced switch from the retail prices index (RPI) to the consumer prices index (CPI) for pension increases, a number of schemes have suffered high profile disputes with members.

In order to avoid a legal challenge, schemes need to prepare for complaints, amend their rules with care and review historic member communications.

In many cases, unrest at schemes has been due to a misunderstanding by members about how increases were made under their plan rules.

If a scheme has a rule referring to statute, rather than to a specified index, it has automatically adopted CPI for pension increases from January 1, 2011.

Some members feel they made contributions into a pension scheme based on receiving RPI increases as deferred or pensioner member. Some members also point to annual statements or announcements, which refer to RPI increases.

At the time the annual statements or announcements were made, the reference to RPI would have been used as ‘short hand’ for the measure of increase used by the government at that time.

Responding to member complaints

Some schemes will already have sent announcements to members on the switch to CPI. This may lead complaints from members who are used to increases based on RPI.

In order to make the trustees or the administrators’ lives easier, a standard letter for a quick response to member complaints should be drafted. This ensures members are not further aggrieved by a slow response.

If a member complains again after received the response, a follow-up letter detailing how the member can use the scheme’s internal dispute resolution procedure should be sent out.

What should schemes do if asked to switch to CPI?

In general terms, pensions in payment tend to be written into the scheme rules, usually linked to RPI or by reference to statute which means an automatic switch to CPI. Pensions increases in deferment are usually linked to statute and therefore to CPI.

In a scheme with ‘hard wired’ RPI increases, the trustees may be asked by the principal employer of the scheme to change the scheme rules.

When considering whether to do this, the trustees will have to think carefully about whether they would be acting in the members’ best interests by agreeing to do so.

If the trustees decide to amend the rules to change pension increases, care needs to be taken when drafting the changes. The government could decide in the future to use a different index for pension increases or revaluation, so the trustees may wish to refer to legislation rather than refer to CPI.

Note that changes to pension increases are likely to become a listed change under the employer pensions consultation regulations. If this is implemented, a minimum of 60 days’ consultation is required before amendments to scheme rules can be made, after having considered any issues raised by members.

Contractual increases

Before making a switch to CPI, the trustees should also check member booklets and announcements. If member booklets have been well drafted, they will be clear that in the event of a conflict between the member booklet and the trust deed and rules, the latter will prevail.

They should also check with the employer to see if increases on deferment or in payment are contractual.

What next?

If having responded to members’ complaints, the members decide to ballot or strike, then the trustees should take legal advice. Check the trust deed and rules to see if they have the power to defend claims, which is usually in the clauses of the trust deed.

If they do not have the power to do so, they should check the scheme amendment power and consider whether it is acting in the best interests of members to amend the scheme rules to permit them to defend their actions in switching to CPI.

This article originally appeared on SchemeXpert.com, an online service provided by the Financial Times. It is intended for general guidance and represents our understanding of the relevant law and practice as at July 2011. Specific advice should be sought for specific cases; we cannot be held responsible for any action (or decision not to take action) made in reliance upon the content of this publication.

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