Back in July, the Minister for Pensions, Steve Webb, made headline news by announcing the Government's intention to move to the Consumer Prices Index (CPI) for the basis of statutory revaluation of deferred benefits coming into payment; limited price indexation; and increases to post-88 guaranteed minimum pensions. The annual revaluation order laid yesterday implements this.

The Government soon discovered that such decisions cannot simply be made by fiat, although that was apparently being contemplated. Because CPI is normally lower than RPI, the idea was bound to be attractive to trustees looking for ways to reduce their liabilities. However, the NAPF claims there is a problem because most pension schemes have RPI hard-wired into their pension scheme rules, rather than just referring to the statutory minimum*.

* It is unclear whether this refers to revaluation of deferred pensions, or indexation of pensions in payment, or both. Aries understands the DWP believes that while 70-80% of schemes may currently be tied in to RPI for indexation, the opposite is true for the revaluation of deferred pensions; ie that the majority of schemes do not have RPI written into their rules and will therefore continue to use the statutory percentages set out each year in the Revaluation Order.

Any rule amendment which trustees of such schemes might attempt to make (where they have the power to do so) arguably would take away subsisting rights, and thus fall foul of the prohibition in s.67 PA 1995 on modification of accrued rights without members' informed consent. It would be almost impossible for trustees to agree that a shift to the historically lower CPI would be in the members' best interests.

Many schemes had hoped for a statutory override to get around the problem, although that would be politically very risky. It's not going to happen. Having spent five months considering the implications, the Minister told the House of Commons on 8 December that the Government did not plan to grant schemes a modification power to make it easier to use CPI when they do not already have the power to amend scheme rules. Nor, as a consultation document published the same day has revealed, will there be a direct statutory override. The Government justified its action stating that interference here would be 'unwarranted', 'complex' and 'unfair' on members whose employer wishes to continue using RPI. It is however, willing to entertain any ideas for implementation of restricted modification powers where RPI was adopted simply to meet the statutory minima.

The consultation document does propose legislation on two points. First, to ensure that schemes that choose (or have no option but) to stay with RPI for increasing pensions in payment (which the DWP thinks is far more common than a similar rule on revaluation for early leavers) do not have to pay CPI in those years when CPI is greater than RPI. (This is historically rare, but occurred in the 12 months to September 2009). This will probably require an amendment to primary legislation.

The second proposal is an amendment to the Employer Consultation Regs (SI 2006/349), to include indexation and revaluation on the list of changes where employers are required under s.259 PA 2004 to consult with their employees (but only where the change would be less generous for the members). Consultation is all that is required for the change to go ahead, though, not members' consent.

In addition, the Government says it has no plans to interfere with existing contracts for buy-outs or buy-ins by means of a statutory override and no plans to interfere with existing annuity contracts.

Increases to GMPs in payment are set out in the annual GMP Increase Order and are determined by the general level of prices or 3% whichever is less. The Government's understanding is that it would be very rare to find scheme rules that set out indexation and revaluation rules for GMPs. Consequently the Government does not propose any further legislation in respect of GMPs as a result of the decision to use CPI as the measure of inflation.

The policy intention (or expectation) in sum seems to be that in many schemes, possibly most, deferred pensions will be increased in line with CPI; pensions in payment in line with RPI; and GMPs in payment in line with CPI. Once more, complification rules. The debate might have been slightly less confused had the issues of revaluation in deferment and indexation in payment been treated separately.