The government has dropped plans to allow defined benefit pension schemes to change their indexation, whilst highlighting the British Steel Pension Scheme's arrangement as an alternative “positive outcome”.

In a white paper on Protecting defined benefit pension schemes published today, 19 March, the government said it cannot accept any reduction in the value of member benefits. Therefore, it has ruled out powers allowing employers or trustees to change scheme rules so that schemes can apply inflation using the consumer price index, instead of the retail price index.

In its original green paper titled Security and Sustainability in Defined Benefit Pension Schemes, the government said there was no case for across-the-board cuts in indexation on affordability grounds but asked for views on whether it should permit an across-the-board change from RPI to CPI on the separate grounds of rationality and fairness.

The government said the financial impacts of allowing schemes to switch to CPI would be significant, reducing some schemes’ liabilities, possibly by as much as £90bn based on an aggregate DB deficit of £200bn. It noted that it would result in direct savings for employers, as scheme deficit repair contributions and on-going employer contributions would be reduced.

However, supporting its decision not to make the change, it said reducing a scheme’s liabilities would have a long-term effect on members’ pension incomes.

“By illustration, the average annual DB pension payment is £8,000: a pensioner on this average pension receiving RPI increases on all their pension could expect their annual pension to be approximately £300 lower after three years following a switch from RPI to CPI than they would be if the pension had continued to be uprated using RPI (assuming CPI is at 2 per cent and RPI at 3.2 per cent),” the report said.

The white paper also touched on the agreement to separate the British Steel Pension Scheme (BSPS) from Tata Steel UK, through a Regulated Apportionment Arrangement. In a consultation on what to do with the BSPS in May 2016, the government proposed four options.

Option one proposed using existing regulatory mechanisms to separate BSPS from the sponsoring employers; option two suggested Tata Steel UK buyout of the scheme; option three was to allow the trustees to reduce the indexation of the scheme and revaluate future payments of accrued pension rights; and option four was to legislate to permit a bulk transfer without member consent to a new scheme which would offer lower indexation and revaluation but pay benefits equal to or greater than the compensation paid by the Pension Protection Fund (PPF).

In actuality none of these options were applied to the scheme, and although a new BSPS was established, members were given the choice to move. Those who opted to stay in the original BSPS will be transferred to the PPF, despite the trustees’ knowledge that some would have been better moving to the new BSPS.

The government was asked by the BSPS trustees and others to apply option four, to allow the trustees to move members to a new scheme without their consent, and the Work and Pensions Select Committee recommend the government bring forward proposals for a “system of deemed consent”.

“This should enable the bulk transfer of members from a DB scheme certain to enter the PPF into an alternative scheme providing unequivocally better benefits than the PPF to those members. It should be used for future cases similar to BSPS,” the Committee said.

Despite this, the government has said that on consideration providing such a wide power in future cases is undesirable.

“We have concluded that it is not necessary or appropriate to bring forward new legislation either to permit the trustee to reduce the pension scheme’s liabilities by reducing future increases (option three in the consultation paper), or to allow the transfer of members to a new scheme paying lower benefits without individual member consent (option four in the consultation paper).”

It concluded that the agreement reached between Tata Steel UK and the BSPS was a “very positive outcome” but said it “strongly believes” there are lessons to be learned from all aspects of this case.

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