Government switches from RPI to CPI

The Government’s decision to alter private sector pension indexation from RPI (retail price index) to CPI (consumer price index) will reduce the value of occupational pensions, warns the Trades Union Congress (TUC).

Minister of State for Pensions, Steve Webb, today (8 July 2010) announced that the CPI will be used as the basis for determining the percentage increase in the general level of prices for the 12 months to 30 September 2010 when preparing revaluation and indexation of pension rights in defined benefit (DB) pension schemes, and in relation to increases in the Guaranteed Minimum Pensions paid by contracted-out DB schemes for pensionable service between 1988 and 1997.

This move will bring into line the indexes used for determining increases for all occupational pensions and payments made by the Pension Protection Fund (PPF) and Financial Assistance Scheme (FAS).

TUC General Secretary Brendan Barber said: “The new government undoubtedly deserves praise for their early commitment to linking the state retirement pension to the higher of earnings or prices, but it now looks as if most other pensions will go up less than they used to in most years.

“Over someone's whole retirement this will add up to a significant loss. CPI is less than RPI in most years because it excludes housing and council tax costs. But even if all other things are equal CPI is on average half a per cent less than RPI because it is calculated in a different way. If pensions in payment today had been linked to CPI instead of RPI for the last twenty years they would now be 14 per cent lower.

“This is a stealth cut on the pensions of middle income Britain.”

The Confederation of British Industry’s (CBI) head of employment and pensions, Neil Carberry, added that statutory indexation is the biggest single regulatory cost that is borne by DB schemes, and welcomed the move. “That makes getting it right important. As CPI is a more accurate reflector of inflation for pensioners than RPI, we welcome this announcement.

“We hope that the Government will also table overriding legislation, to ensure that schemes whose rules currently prevent them from taking advantage of this change can do so.”

And while KPMG welcomed the change, which could in effect reduce private sector pension liabilities by up to £100bn, warned that this could create a pensions lottery.
“We urge the government to make the legislation apply equally to all schemes and avoid a small print lottery for schemes and their members depending on technicalities and details of the scheme’s legal documents,” said Mike Smedley, pensions partner at KPMG in the UK.

KPMG said other areas will be affected, with LDI investment strategies which hedge RPI liabilities potentially having to be unwound, companies; accounts and actuarial valuations having to reflect the changes, and PPF levies reducing along with changing benefits.

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