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Pensions Bill [HL]

I am most pleased to take this opportunity to inform the Royal Statistical Society of the results of extensive research, which I know it will take into its considerations when it looks at this again. I think that it would help if I set out exactly what Clause 14 does and why. It does two things. First, it addresses some peripheral references to RPI in occupational pension legislation that need to be removed or amended to ensure that the Government’s decision to use CPI as the best measure of inflation is applied consistently from now on. Secondly, it addresses the so-called ““CPI underpin”” issue. That arises where a scheme carries on increasing pensions in payment by the RPI. As the statutory minimum is calculated by reference to the CPI, such schemes would be required to track both the CPI and RPI and pay the higher, a bit like the old escalator in the funhouse in Tivoli in Copenhagen. We have made it very clear that statutory increases are minima, and we do not want to discourage schemes from making higher increases. Consequently, the clause before us ensures that schemes that continue to increase by reference to RPI are not subject to this funhouse ratchet effect. The first reference to RPI is in Section 84 of the Pension Schemes Act 1993. This is a fairly obscure provision that caters for special arrangements in schemes which provide full uncapped revaluation on the whole pension including the guaranteed minimum pension. Clause 14(1) to (3) replaces the explicit reference to RPI in Section 84 with a requirement that these schemes must maintain the value of the pension in line with the rise in the general level of prices. This ensures that Section 84 provides for uprating in the same way as the other pension legislation. The noble Baroness’s first amendment, reinserting a reference to RPI, effectively does nothing more than revert Section 84(5) to what it already says. It will certainly not restore RPI indexation or revaluation more generally. The second reference we are addressing in Clause 14 is in Section 40 of the Welfare Reform and Pensions Act 1999. This concerns the indexation of pension credit benefits, which are pension rights deriving from a pension sharing order made as part of a divorce settlement. Clause 14(6) to (8) replaces the existing reference to RPI with a cross-reference to the inflation percentage adopted by the Secretary of State for the purpose of the annual revaluation order. The remaining part of the clause concerns Section 51 of the Pensions Act 1995. Section 51 sets out the requirements for indexation of pensions in payment. The amendments to Section 51 of the Pensions Act 1995 in Clause 14 will also ensure that where schemes continue to increase pensions by RPI they need not carry out an annual comparison of the RPI increase required under the scheme rules and the statutory increase using CPI and pay the higher of the two. If a scheme increases pensions by reference to RPI, and has done so since the start of January 2011, then it will escape the statutory requirements of Section 51(2). This deals with the CPI underpin issue to which I referred earlier. The amendments in Clause 14 also make amendments to ensure that Section 51(3) continues to apply as intended now we are using the CPI to measure inflation. Section 51(3) exempts schemes from the statutory indexation requirement where they increase pensions in payment at least by capped RPI measured over an annual period defined in their rules. Inflation for statutory indexation is measured at 30 September, but some schemes want to continue measuring at a different time and that is fine—Section 51(3) currently allows them to do that. The clause has the effect that if schemes increase by CPI, RPI or a combination of the two under their rules, they will continue to be exempt from the statutory indexation requirements. At the moment it is only schemes with RPI rules that would be exempt. All we are doing is making sure that an existing provision, which is very convenient for a number of schemes, is carried forward into a world where some or all pensions in payment will be increased by reference to CPI as well as RPI. I am afraid that the noble Baroness’s second amendment would undo the part of the clause that allows schemes that increase by reference to CPI to use their own inflation reference period. Again, it will do nothing to restore RPI indexation or revaluation more generally. For that reason, and for the reasons that I set out earlier in respect of Amendment 47, I urge the noble Baroness not to press her amendments. On Amendment 48A, I stress again that deciding the increase in the general level of prices is an annual duty, and that as the Government have made clear many times over, we believe that the CPI is the most appropriate measure. Publishing a triennial report on the impact of using the CPI will not change that. That is not to say that we are not interested or do not care about the impact—of course we do—but it is important to look at the broader context, not one part of the picture in isolation. We are also mindful of the impact on private sector pension schemes and their members. That is why we issued a consultation paper in December about the impact of using the CPI on private sector occupational pension schemes. That consultation finished on 2 March and we are currently considering the responses. The noble Lord, Lord McKenzie, has asked when we will be able to share those responses. I can only ask him to show us a little more patience. I think that we have around 150 submissions, and some of them are extremely detailed and complex. We are also conducting social research to investigate the impact of the change from RPI to CPI for statutory revaluation and indexation of private sector pensions. We hope to publish findings from this research before summer. On the question asked by my noble friend Lord Boswell, RPI should not be distorted by being used less, although I remind him that both indices, the RPI and the CPI, are continuously undergoing a process of modification. We are constantly monitoring the impacts of our policies. In the case of private pensions, we can call on the annual Occupational Pension Schemes Survey, the annual Family Resources Survey, the Purple Book and the biennial Employer Pension Provision Survey, to name but a few. With the assurance that we are mindful of the need to understand the impact of the change and that we have a number of existing tools that will allow us to do precisely that, I hope that the noble Baroness and the noble Lord will feel able to withdraw the amendments.