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| Pension inflation changes will not be forced through | |
| (40 minutes later) | |
| Ministers have backed away from forcing company pension schemes to use the Consumer Prices Index rather than the Retail Prices Index to uprate pensions. | Ministers have backed away from forcing company pension schemes to use the Consumer Prices Index rather than the Retail Prices Index to uprate pensions. |
| Such a change would have cut the value of people's pensions because they would have grown more slowly than before. | Such a change would have cut the value of people's pensions because they would have grown more slowly than before. |
| The change has already been introduced for the state and public sector schemes from next April. | The change has already been introduced for the state and public sector schemes from next April. |
| But the pensions minister Steve Webb said he would not force private sector pension schemes to do the same. | But the pensions minister Steve Webb said he would not force private sector pension schemes to do the same. |
| "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. | "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. |
| "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." | "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 | 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. | 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. | 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. | 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. | However it will not be compulsory for private sector schemes to adopt it. |
| The goverment also said it intended to make it compulsory for employers to consult their staff if they wanted to change their method of inflation uprating. | |
| Labour said it was opposing the switch to CPI as no time limit had been set on the policy. | |
| Reduced value | Reduced 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. |
| 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. |