The Chancellor announced in June that, with some exceptions, the basis for uprating most benefits and public sector pensions would move from the retail price index to the consumer price index.
This change would also be reflected in other references to price inflation in pension legislation and, although generally well received by businesses, the measure has caused controversy among workforces.
Latest figures from the Office for National Statistics indicate that for the 12-month period to July 2010, the increase in RPI was 4.8 per cent while the increase in CPI was 3.1 per cent. The concern of pension scheme members is that CPI typically runs at a lower rate of increase than RPI, resulting in a fall in the rate at which pensions will increase in future. Clearly, the change impacts on the revaluation and indexation of pension rights where a pension scheme uses the statutory minimum approach. However, the detailed rules in relation to increases can vary significantly between pension schemes, meaning that some may offer increases greater than the statutory minimum.
In some cases, the increases linked to the retail price index are hard-wired into the scheme rules and may also be affected depending on when pensionable service arose and other aspects of the scheme rules.
They are both measures of inflation, so what is the difference between the two?
The RPI is the more familiar of the measures and it includes such things as mortgage interest rates, council tax and some other housing costs that are not part of the CPI basket.
The CPI is generally considered to be a more accurate reflector of inflation for pensioners, is arguably based upon a wider sample of the population and it includes certain financial services items that are not included in the RPI basket.
Because RPI includes mortgage interest rates, movements in those rates will result in corresponding movements in RPI but not CPI.
The latest criticism of the Government’s decision has come from the Royal Statistical Society which, accepting that RPI itself is far from perfect, has expressed concerns about the manner in which the difference in the statistical treatment of the two indices results in a substantial variation in the rates of increase.
Concerns about the change have escalated in recent weeks and it is becoming clear that schemes where RPI has prom-inence may find it is not going to be straightforward to implement. Some pension experts consider the change is so significant as to warrant a full consultation process.
One thing seems certain. Even if a solution is found, controversy on this moneysaving measure is set to continue for some time.
Stephen Greenstreet is managing director of Origen