Limited Price Indexation
Encyclopedia
Limited Price Indexation or LPI is a pricing index used in the calculation of increases in certain components of scheme pension payments in the UK
. The LPI is the Retail Prices Index
(RPI) capped at 5%. Since the introduction of the LPI, the RPI has never reached 5%, so to date the LPI has been equal to the RPI.
required scheme pension payments arising from excess contributions to increase at the LPI. Excess contributions are those that are not protected rights contributions from contracting out of State Earnings-Related Pension Scheme
(SERPS) or the State second pension
(S2P) nor any Additional voluntary contributions (AVCs). Only contributions made after 1997-04-06 are required to increase at the LPI, so these contributions are known as post '97 excess contributions.
The rules were later amended by the Pensions Act 2004
so that excess contributions made after 2005-04-06 only had to increase at RPI capped at 2.5% instead of 5%.
In either case, the scheme can of course pay increases greater than the statutory minimum.
The rules for payment increases only apply to scheme pensions, i.e. pension payments made from a defined benefits (DB or final salary) scheme. Payments arising from contributions into a money purchase pension scheme (also known as a defined contribution pension scheme) are not required to increase. This is because the scheme member has the right to use their fund value to purchase an annuity
with their own chosen rate of increase, which could be zero if a level pension is chosen. This right is known as the open market option
(OMO) and following A-day, the member also has the right to enter into an unsecured pension arrangement.
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
. The LPI is the Retail Prices Index
Retail Prices Index (United Kingdom)
In the United Kingdom, the Retail Prices Index or Retail Price Index is a measure of inflation published monthly by the Office for National Statistics. It measures the change in the cost of a basket of retail goods and services.-History:...
(RPI) capped at 5%. Since the introduction of the LPI, the RPI has never reached 5%, so to date the LPI has been equal to the RPI.
Usage
The Pensions Act 1995Pensions Act 1995
The Pensions Act 1995 is a piece of United Kingdom legislation to improve the running of pension schemes.-Background:Following the death of Robert Maxwell it became clear that he had embezzled a large amount of money from the pension fund of Mirror Group Newspapers...
required scheme pension payments arising from excess contributions to increase at the LPI. Excess contributions are those that are not protected rights contributions from contracting out of State Earnings-Related Pension Scheme
State Earnings-Related Pension Scheme
The State Earnings Related Pension Scheme was a UK Government pension arrangement, to which employees and employers contributed between 6 April 1978 and 5 April 2002, when it was replaced by the State Second Pension....
(SERPS) or the State second pension
State Second Pension
The State Second Pension, or S2P, was introduced in the UK by the Labour Government on 6 April 2002, to replace the SERPS...
(S2P) nor any Additional voluntary contributions (AVCs). Only contributions made after 1997-04-06 are required to increase at the LPI, so these contributions are known as post '97 excess contributions.
The rules were later amended by the Pensions Act 2004
Pensions Act 2004
The Pensions Act 2004 is an Act of the Parliament of the United Kingdom to improve the running of pension schemes.-Background:In the years following the introduction of the Pensions Act 1995, it was widely perceived that it was failing to offer the protection to pension scheme members that had...
so that excess contributions made after 2005-04-06 only had to increase at RPI capped at 2.5% instead of 5%.
In either case, the scheme can of course pay increases greater than the statutory minimum.
The rules for payment increases only apply to scheme pensions, i.e. pension payments made from a defined benefits (DB or final salary) scheme. Payments arising from contributions into a money purchase pension scheme (also known as a defined contribution pension scheme) are not required to increase. This is because the scheme member has the right to use their fund value to purchase an annuity
Annuity (European financial arrangements)
An annuity can be defined as a financial contract which provides an income stream in return for an initial payment with specific parameters. It is the opposite of a settlement funding...
with their own chosen rate of increase, which could be zero if a level pension is chosen. This right is known as the open market option
Open Market Option
The Open Market Option was introduced as part of the 1975 United Kingdom Finance Act and allows someone approaching retirement to ‘shop around’ for a number of options to convert their pension pot into an annuity, rather than simply taking the default rate offered by their pension provider.The...
(OMO) and following A-day, the member also has the right to enter into an unsecured pension arrangement.