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Pension inflation proofing may be cut Pension uprating left unchanged, minister announces
(30 minutes later)
A consultation on changes to pension scheme rules that could cut the value of pensions is about to be launched by the government. Ministers have backed away from forcing company pension schemes to use the Consumer Prices Index rather than the Retail Prices Index to uprate pensions.
In July, Pensions Minister Steve Webb said he wanted to let occupational pension schemes use the Consumer Prices Index (CPI) for inflation proofing. Such a change would have cut the value of people's pensions because they would have grown more slowly than before.
It would replace the faster-rising Retail Prices Index (RPI). The change has already been introduced for the state and public sector schemes from next April.
Any such change might override existing pension law and the rules of schemes which specify the use of the RPI. But the pensions minister Steve Webb said he would not force private sector pension schemes to do the same.
Current legislation makes it very difficult for pension scheme trustees and employers in the private sector to cut the value of pension benefits already promised. "We do not plan to grant schemes a modification power, to make it easier to use CPI where they do not already have the power to amend scheme rules," Mr Webb told MPs.
The government has already used its powers to introduce such a change, from April next year, for public sector pension schemes. "We believe that members' trust in schemes and the scheme rules would be severely damaged if we intervene to give schemes the power to change their rules if the scheme does not already have such a power."
Public sector
The possibility of such an enforced change was raised in July when, in the wake of the new public sector pension policy, Mr Webb said he wanted private schemes to adopt the CPI for their own inflation uprating.
However current pensions law largely prevents employers and scheme trustees from changing their rules to cut the value of pensions that have already been accrued.
Rather than try to override this, the government is now consulting on a proposal to make the use of the CPI the minimum requirement for such uprating for private schemes.
However it will not be compulsory for private sector schemes to adopt it.
Reduced valueReduced value
Since the CPI was first introduced in 1996 it has lagged behind the RPI by an average annual rate of 0.83 percentage points.Since the CPI was first introduced in 1996 it has lagged behind the RPI by an average annual rate of 0.83 percentage points.
That is because it measures changes in the prices of different items than the RPI - principally ignoring mortgage interest payments, council tax, buildings insurance and house-buying costs - and it measures those changes using different arithmetic techniques.That is because it measures changes in the prices of different items than the RPI - principally ignoring mortgage interest payments, council tax, buildings insurance and house-buying costs - and it measures those changes using different arithmetic techniques.
The newly established Office for Budget Responsibility recently estimated that the gap between the two indexes, vital for the inflation uprating of pensions each year, would spread to 1.2 percentage points over the next five years.The newly established Office for Budget Responsibility recently estimated that the gap between the two indexes, vital for the inflation uprating of pensions each year, would spread to 1.2 percentage points over the next five years.
Over 20, 30 or 40 years of retirement such a difference would make a sharp cut to the value of someone's prospective pension.Over 20, 30 or 40 years of retirement such a difference would make a sharp cut to the value of someone's prospective pension.
Any change in the rules along these lines would probably also affect the annual uprating of deferred pensions - the pensions of people who have left an employer but not yet retired - and possibly also the annual uprating mechanism embedded in "career average" pension schemes.
The potential saving to pension schemes of adopting CPI was illustrated in November by BT.The potential saving to pension schemes of adopting CPI was illustrated in November by BT.
Its pension trustees decided that their rules meant they automatically had to use the slower rising measure of inflation, now that it is being used for the state and public sector schemes, and that this would knock £2.9bn off BT's £9bn pension scheme deficit.Its pension trustees decided that their rules meant they automatically had to use the slower rising measure of inflation, now that it is being used for the state and public sector schemes, and that this would knock £2.9bn off BT's £9bn pension scheme deficit.