A move from RPI to CPI will reduce Tata Steel’s pension liabilities by £2.5bn
26 May 2016 - Estimated reading time: 60 seconds
The Government is expected to announce a change to the rules for the British Steel Pension in an effort to reduce its liabilities to help Tata Steel find a buyer. The change would allow it to base annual pension increases on the Consumer Prices Index (CPI) inflation measure, which is usually below the Retail Prices Index (RPI) measure currently used by the British Steel Pension.
Explaining the difference between RPI and CPI, Clive Fortes, Partner at Hymans Robertson, the leading pensions and benefits consultancy, said:
“In 2011 the Government changed statutory pension increases from RPI to CPI. If CPI is used, pension entitlements increase by around 1% less per annum than under CPI. Over a 15-20 year period, that’s a 15-20% reduction on the size of an individual’s pension.
“Whether or not a scheme has the flexibility to adopt CPI comes down to how the lawyer wrote scheme rules before 2011. Some schemes, such as British Airways, allow the flexibility to adopt CPI. Others, such as British Steel, clearly don’t. There’s a ‘scheme rules lottery’ in respect of RPI and CPI.
“It’s a dangerous precedent to allow employers to change scheme rules. Reports seem to suggest the Government will only allow this to happen in an ‘emergency’. But we need a very clear definition of what constitutes an ‘emergency’".
Explaining what this means for Tata, he added:
“Moving to CPI is likely to reduce pension liabilities by around £2.5bn. Clearly the pension is currently a deal breaker for would be buyers. This could make a difference.
“For a British Steel pensioner with a £5,000 per annum pension, a move to CPI will see them £50 worse in year one, £100 in year two and so on. Over a typical pensioners’ lifetime this is a loss of £15,000 of lifetime savings. On the plus side, this only one third of the average loss of falling in to the Pension Protection Fund.
“In almost every commercial scenario, except pensions, it’s possible for creditors to agree a deal. There needs to be balance, but not at the cost of endangering the security of millions of others people’s pensions. We need clarity from the Government over exactly what it’s proposing.”