Pensions experts question inflation rate changes

10 August 2010

Pension industry experts have raised doubts about proposals to couple private pension increases with the consumer prices index of inflation.

Occupational pensions have been traditionally linked to the retail prices index.

However, the government announced last month that private pension payments would, where possible and as from early next year, switch to the CPI as a way of calculating any increases.

The CPI measure of inflation, which does not take mortgage prices into account, is usually lower than the RPI rate. The move is intended to reduce the deficit in final salary pension schemes by as much as £100 billion over the years.

But now an online pensions forum, Mallowstreet, has written to the government arguing that the change has been introduced too quickly and without a consultation of due length.

Philip Read, chairman of British Coal pension trustees, described the retrospective legislation as a "potential nightmare" and suggested it could breach the rights of many pension fund members who have been promised the higher RPI-linked increases in their retirement incomes.

In response, the Department for Work and Pensions said that there needs to be a consistency in the treatment of public sector and private sector pensions.

A spokesman for the Department pointed out that the government had already "decided that CPI is the most appropriate measure of inflation for state pensions and benefits, and it is appropriate to take a consistent approach for private pensions".

On average, the CPI measure of inflation climbs by 0.7 per cent less annually than the RPI rate. Although the Office for Budget Responsibility has estimated that the deficit between the two may be as great as 1.2 per cent over the coming years.

It is thought that the effect on private pensions will be to reduce pension payments by as much as 25 per cent if the changes are implemented.

However, not all private pension schemes may be affected.

A substantial number, maybe as many as 50 per cent, have rules that state that payment increases must be linked to RPI as opposed to the measure preferred by the government. Any change would be against the law as it would involve a deterioration of benefits.

Some other funds have a different type of measure altogether.

Employers are being advised to investigate the small print of their pension schemes to determine whether they can make a change or not.