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.