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CPI switch cuts a third from next year’s pension increase

Pension increases will be cut by almost a third next year as a direct result of the coalition Government switching its benchmark from the retail prices index to the consumer prices index, research shows.

Figures from consultants Towers Watson show the decision to amend the measure of inflation, which comes into force today, will reduce next year’s increase from 4.6 per cent to 3.1 per cent.

The change will initially hit public sector workers, those enrolled in the second state pension and some private sector defined benefit schemes, according to Towers Watson.

Only the state pension will be exempt for the coming year, rising instead by the highest of the two measures, as it will be switched in April 2012.

Towers Watson head of UK pensions John Ball says a public sector worker receiving a £10,000 pension would lose out on £150 when their benefits are evaluated in April.

The situation in the private sector remains much less clear cut, with the Department for Work and Pensions expected to consult on the implications of the announcement shortly.

“Three months after the government said CPI inflation would be used in private sector schemes, employers and trustees are still in the dark as to what the policy is,” Ball says.

“It has not said employers will be allowed to override scheme rules without trustees’ consent, nor ruled this out. Unless that happens, many pensioners will still be able to look forward to RPI-based increases.”

Standard Life head of pensions policy John Lawson cast doubt on the assumption that, over the long-term, RPI will outstrip CPI.

He says increases in RPI – a measure of inflation which includes house prices – have been driven by a 15-year “property bubble” which is unlikely to be maintained in the long-run.

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. The minimum rate of increase that private sector schemes are obliged to provide is only a minimum, not a maximum. If the Trustees of private sector schemes wish to provide a rate of increase higher than the minimum (assuming the scheme itself can afford it), they are (as I understand it) quite free to do so.

    The few people with index linked annuities may suffer though, unless their policy makes very clear just what index will be observed.

    As for the recipients of public sector pensions ~ well, who else feels any sorrow on their behalf?

  2. I pleased state pension has gone up £102.14 per week. I support winter fuel payment at £250. Britain state penions in to low. The
    British people must fight for higher state
    pension at £170 per week like France or
    Germany.

  3. Julian Stevens’ brainless and vindictive comment reveals the knee-jerk hatred people feel for the public sector: George Osborne and Co. feel the same. Only one problem. There are a lot of public sector workers and pensioners, we all have the vote, and we will use it.

  4. Note that the ONS stated a couple of weeks ago that the way CPI is measured is to be changed to inlcude housing costs. So in future CPI will be higher than it has been to date.

    Am surprised that no one seems to have noticed this. Instead people just carry on with their knee jerk reactions to everything (Richard – pot, kettle, black)

  5. Mr Thomas Boyd
    I pleased state pension has gone up £102.14 per week. The British people must fight for higher state pension at £170 per week like France or Germany.

    ——-

    The maximum “Basic State Pension” is going up to £102.14 per week. The maximum total UK state pension figure is around £262 per week. The problem is that many of those complaining have not had a proper work history and/ or have not saved for much of their lives hence the low pension amounts they receive. What people are really saying is that they want a higher state pension but they do not want to pay for it. I guess we’ll see this goverment’s solution next month in the Green Paper

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