Employers could be losing substantial amount of money on DB Schemes as the basis for the statutory minimum increases for pensions change from Retail Price Index (RPI) to the Consumer Price Index (CPI), warned John Broome Saunders, director at Broadstone Pensions and Investments.
Mr. Saunders said rather than depending too much on trustees and their lawyers for the RPI and CPI linked interpretations; DB scheme sponsors should take more interest in the matter.
Some DB scheme rules might not clearly mention if trustees are allowed to choose an index or a particular measure of inflation.
“This typically means that trustees end up concluding that they should stick with more generous RPI increases, not least because many trustees, as scheme beneficiaries, have a vested interest in higher increases”, he said.
“Scheme sponsors and their advisers need to take more interest in this issue. In many cases sponsors may have credible grounds to argue the case for lower CPI-linked increases which could give an immediate reduction to any scheme deficit and save them substantial sums in the long term”, he explained.
However, not everyone agreed with Mr. Saunders. “Some schemes switch to CPI to reduce the deficit and to reduce the potential liability of the scheme. However, beneficiaries and potential pensioners would not be too happy as it would reduce overall benefits”, argued Mike Pendergast – IFA at Zen Financial Services.
“The decision to switch can depend on the union strength of membership, the general attitude of members and the size of the deficit”, he said.