Public sector pensions - cpi instead of rpi 24 June 2010 at 5:44PM in Pensions, annuities & retirement planning 113 replies 29.7K views

mrnatural

The Consumer Price Index (cpi) differs from the Retail Price Index (rpi) in not including certain items including Council Tax and buildings insurance which certainly affect many public service pensioners. The mathematical basis of calculation is also different for cpi and rpi. The effect of these differences is that uprating on the basis of cpi is on average about 1% less than uprating on the basis of rpi. One percent may not seem very much for one year, but the cumulative difference will become substantial over the course of a retirement lasting a number of years. After 10 years in payment a pension increased on the basis of cpi would be worth about 10% less than one based on rpi increases. After 20 years, when the pensioner would be 80, his cpi increased pension would be worth about 20% of what it would have been under rpi. If he should be fortunate enough to survive to be 90 his cpi pension would be worth 30% less than an rpi one.

This change would appear to breach the government's commitment not to interfere with accrued public service pension rights.

yelf

oh well............

Neasy

That's what I thought too, at first. Then I started digging.

The LGPS website is quite clear that "LGPS pensions increase every April in line with the Retail Price Index (RPI), or cost of living. "

However, according to the LGPS regulations, pensions in payment are actually increased according to the provisions of the the Pensions (Increase) Act 1971 . Presumably, the government are allowed to alter the basis on which pensions are indexed by amending this legislation or accompanying regulations.

It may not just be pensions in payment, though. The Civil Service "nuvos" pension, which works by putting a certain percentage (currently 2.3% but I wouldn't bet on it staying that high) of a member's salary into a "pension account" and applying an annual increase which I believe is also governed by the Pensions (Increase) Act 1971 according to what I can make out from the rules :

"(8) For the purposes of paragraph (4), the index addition in respect of any description of opening balance for a scheme year is the amount by which an annual pension of an amount equal to that opening balance which was eligible to be increased under the Pensions (Increase) Act 1971 would be so increased in the scheme year if the beginning date for that pension were the first day of the previous scheme year."

So presumably the RPI to CPI switch happens by jiggling about with the Pensions Increase regulations, and applies not just to pensions in payment (and deferment?) but also to index additions in Nuvos.



Sorry it won't let me put the links in

Smartmart

I have just received this reply from my pension provider in Swansea: just received a reply from my LGPS in Swansea
"I refer to your email dated 28/06/2010 and confirm that the changes would apply to the LGPS.

If you wish make your feelings known I suggest you write to your Member of Parliament."

The changes being from RPI to CPI. I have a deferred pension payable when I am 60 in 2013. My present deferred pension is kept in line with the RPI.

I agree with the concerns expressed with these changes, which extend to benefits and the state pension. Perhaps others can also check and we can compare the replies.

Stargazer57

mrnatural wrote: »

This change would appear to breach the government's commitment not to interfere with accrued public service pension rights.

Perhaps the linkage to RPI (rather than CPI) was an expectation rather than a right. I'm sure this won't stop public sector pensioners complaining, but nor does the knowledge that these pensions are worth more than double what they were when most of the public sector workers started to earn them. (If you doubt this check out how much it would cost you to buy the pension now and how much it would have cost in the past.)

novice-saver

The difference between CPI and RPI is less to worry about than this:

http://www.guardian.co.uk/media/2010/jun/29/bbc-pensions

The public sector may well get something similar

OR, if you are in a private sector pension with a company that fails, the PPF will pay some pension:

http://www.pensionprotectionfund.org.uk/Pages/Compensation.aspx

you may get up to 100% of the pension you previously had, BUT there are NO INCREASES for pre 1997 service, and capped RPI at 2.5% post 1997.



The dust hasn't settled yet.

shaunrc

There is going to be a lot of debate on this issue as time goes by. The change from using the Retail Price Index to the Consumer Price Index will spread. For example it is going to affect benefit payments and public sector pensions going forwards and there is a review coming to look at using CPI for indexation of tax allowances. Sooner or later it is likely to affect private sector final salary pensions.

I write an economics blog which discusses inflation as one of its main topics and I did an update for budget day showing some examples of the differences this move might make. Obviously one cannot predict the future but one can look at what would have happened if this change had been made in the past. For those interested this can be found on http://notayesmanseconomics.wordpress.com

Whilst such moves may seem insignificant over time they build up with the power of compound interest. One can be in little doubt that this move is a significant downgrade.

Andy_L

shaunrc wrote: »

There is going to be a lot of debate on this issue as time goes by. The change from using the Retail Price Index to the Consumer Price Index will spread....Sooner or later it is likely to affect private sector final salary pensions.

However they do have the absolute right to protection of indexation rates for accrued service unlike this "bodyswerve" employed to alter accrued rights for public sector pensioners.
We're have to see what the outcome of the, no doubt imminent, legal action is.

joem1619

I contributed 6% of salary into my Local Government pension for 40 years.
The basis of the scheme was an RPI annual increase. This year we got no increase because mysteriously RPI fell to a negative figure in September 2009 before shooting up again.
My pension fund is well run and has more than adequate sums to meet existing and upcoming demands. I take exception to the Government amending the agreed basis on which I paid in.
This whole media circus painting public sector pensions as 'gold plated' is a disgrace. So go back to your BUPA and gym membership,company car and bonuses and stop whining.

Old_Slaphead

joem1619 wrote: »

I contributed 6% of salary into my Local Government pension for 40 years.
The basis of the scheme was an RPI annual increase. This year we got no increase because mysteriously RPI fell to a negative figure in September 2009 before shooting up again.
My pension fund is well run and has more than adequate sums to meet existing and upcoming demands. I take exception to the Government amending the agreed basis on which I paid in.
This whole media circus painting public sector pensions as 'gold plated' is a disgrace. So go back to your BUPA and gym membership,company car and bonuses and stop whining.

Are you sure ???? Do you have evidence that it's fully funded ???? Have you looked at the pension funds accounts lately ??? If not I suspect you've got a big shock coming when the 2010 3 year funding review is completed.

nb 99% of private sector employees do not get bonuses, gym membership, cars, BUPA etc neither do they get a massively taxpayer-subsidised pension.
FWIW my local district council employees ACTUALLY DO get subsidised gym membership & highly subsidised canteen facilities !!!

cvd

The problem with the debate is that people see the issue as black and white. It is not.

It is, in my opinion, wrong that a manager in a local authority or a top civil servant or a head-master retires on a pension of £50,000 per year inflation linked for life.
However, I also regard it as wrong that some low paid worker in a local council who perhaps raises a family and only works for 15-20 years and retires on a pension of say £4000 per annum gradually sees the value of her pension fade away and ends up depending on state handouts because the pension is not uprated with RPI.

There is a middle way.