Consultation questions & responses

Q1: The Government welcomes views on whether the impact of using CPI has been correctly summarised

This section correctly identifies that for historical reasons a few schemes in the private sector have rules which specify pension increases in line with the Pension Increase Order. British Airways has two such schemes and together these schemes provide benefits to over 80000 members. It would be very unfair if their accrued benefits were to be increased only by CPI as they are not publicly funded schemes and the resulting saving of £1BN (a conservative assumption made by Towers Watson the scheme actuary) will accrue to IAG shareholders at the expense of the members. Members pensions will be lower on average over their lifetime and so they will pay less income tax and be more likely to claim means tested benefits thus placing more strain on the public purse to benefit a private company. Therefore we submit that some way must be found to remedy this accident of history and to free all private
sector schemes from the effect of the change to the CPI in the Pension increase order.

Q2: The Government welcomes views on whether it is right to apply the employer consultation requirements in respect of changes to scheme rules on indexation and revaluation

Since revaluation and indexation form a large proportion of the value of a defined benefit it is essential that the employer consultation requirements should apply if either or both are to be reduced. Consultation should not be required where the custom and practice of basing both on the RPI is now to be written into the rules and so hard wiring the expectation.

Q6: The Government welcomes views on whether there is any justification for overriding the rules of private sector occupational pension schemes to impose CPI as the measure of increase in prices

There is no justification for this either for accrued rights or future service benefits. Government action to impose CPI disturbs the relationship between employer and its employees past and present.

BA negotiated a series of cuts in future service benefits with the current active members which members would never have agreed to had they known that the pension increase order was to be based on CPI. Members accepted higher contributions and lower accrual rates rather than accept a cap of 2.5% on indexation. BA itself has acknowledged that BA will save hundreds of millions of pounds that the company had expected and budgeted to spend on benefits. Had members known about this they would have viewed these savings as being available to offset the reductions in future benefits that they accepted. Dialogue between management and employees is now underway in an attempt to redress this.

It is quite wrong for the government to legislate to reduce the value of accrued rights.

Members have made any number of decisions based on the understanding that indexation and revaluation were linked to RPI i.e. whether to pay extra contributions, whether to transfer out of the scheme, whether to commute pension for a cash sum etc

Pensioners should be able to rely on the state protecting the income due to them from their employers (after all the pension protection fund was introduced to do just that) instead the proposal is to impose measures that allow companies to pay out lower pensions!

Q8: The Government welcomes views on whether it is right to rule out granting modification powers

Modification in the few private sector schemes which use the Pension Increase Order is difficult and the government should grant special statutory powers to them to replace references to the pension increase order with RPI or CPI. In the Airways Pension Scheme the trustees have a unilateral power of amendment providing that no benefits already accrued or arising in the future are reduced. There is no need to get employer consent. However the trustees find it difficult to amend the pension increase rule to some known basis as the pension increase order is not limited to using RPI or CPI and in the future could use another measure. The Trustees of the BA schemes are considering taking the issue to the High Court to see whether they can legally hard wire RPI increases into the rules. The risk of breaching the trust deed of a scheme by introducing a known measure to replace the pension increase order should be removed.

Q10: The Government welcomes views on whether you agree the issue of CPI underpins should be addressed and Q11: The Government welcomes views on whether there are any other options to address the CPI underpin issue

It is essential that this issue is addressed. Schemes should be able to comply with the law by using either CPI or RPI. The statutory minimum increase should be indexation using either index or indeed any other appropriate index that measures the UK cost of living (In future a specific
pensioner price index may be commonly accepted). It is not necessary for legislation to specify which index is to be used.

Private sector schemes which have granted increases in line with the Annual Review Order should be exempted from the need for a CPI underpin just as those schemes with hard wired RPI are to be. Having used the Annual review Order and thus given RPI increases members expectations are met by continuing to give increases in line with RPI and not to receive a higher amount on the rare occasions when CPI is higher.