Andrew Vaughan, Chairman of the Association of Consulting Actuaries (ACA) has called for the Government to act within the next year to make Limited Price Indexation (LPI) of pensions in payment by defined benefit schemes optional from 2016 onwards. The call has been made following the Government’s decision to move forward the end of contracting-out to 2016 alongside the implementation of the single-tier State pension. He welcomed today’s announcement by DWP that the private pensions ‘red tape challenge’ was continuing to examine this idea.
As a result of the 2016 change, all employers who have a defined benefit scheme that is currently contracted-out and still open to future accrual will have to review and revise their scheme. It is feared many may take the opportunity to close their DB scheme unless they can see the prospect of DB reform.
“Optional LPI would allow sponsors of defined benefit schemes some breathing space ahead of what certainly I hope will be a raft of new pension options and flexibilities that will emerge from the ‘Defined Ambition’ project, where the ACA has been heavily involved with the Defined Ambition Industry Working Group which has been supporting the DWP on the project over recent months,” said Andrew Vaughan.
“Inevitably, ideas flowing from the ‘Defined Ambition’ project will either require some, or maybe even major, changes in legislation, or indeed there may need to be time for new market responses to take off, but these reforms are unlikely to be completed early enough to allow many of the ‘reviewing’ employers to use these new options ahead of 2016.
“I know the recent report of the Work & Pensions Select Committee hopes these reforms and easements will be ready by 2016 – that may be optimistic for some of the new options.
“And let me just be clear on what optional Limited Price Indexation for the future means. It doesn’t mean all employers have to make the change – if they wish and can afford to continue to automatically index pensions in payment then they should be free to so do.
“The change I propose here would not affect accrued rights.
“And, members retiring and wishing to use some of their pension to index that pension, should be free to buy this option.
“In essence, the move would help employers to have more flexibility over the cost of providing defined benefit pensions ensuring more members continue to receive the greater certainty of pension that undoubtedly they wish to retain.
“It remains my view that if we could get some cross-party consensus on the ideas emerging from the ‘Defined Ambition’ project, it is perfectly possible for more employees to be offered workplace pensions that will give them greater pension certainty and security than many have at present, whilst also offering to employers the flexibilities and ability to cap their pension costs long into the future.”
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