Cpi - rpi Final Salary Schemes

MikeJones_2

Hi Mozette,

Mozette wrote: »

The government should stop putting up the price of booze and ciggies and let people die earlier then!

I specifically thought of your comment when I read an article today.

Anyone interested in pensions knows about the issues created by increased life expectancy. So if, like me, you’re one of those people fascinated by statistics, here’s a great one to ponder:

‘Despite health concerns surrounding rising levels of obesity and alcohol use, death rates for both men and women fell by about 5% in 2009 from 2008. There were under half a million deaths registered - the last time the figure fell this low was in the mid-1950s, when the population was 10m smaller.’

See:
- Death rates at lowest ever levels in England and Wales (BBC.co.uk)

Website Link Permission: None expressed in the BBC's Terms of Use, but I've emailed the BBC to clarify linking policy for this article.

Interesting though, don't you think?

Mike

I work in the field of Pension Education and Pension Guidance in the UK. I am a member of the Specialist Pensions Forum as well as being a Voluntary Adviser for The Pensions Advisory Service. I work with scheme members, employers, trustees, scheme administrators and advisers on most things to do with employer sponsored pension schemes. The views expressed by me in this thread are my personal opinions. You should seek professional advice from an appropriately experienced and qualified adviser. I am not an IFA.

markr007

Part of the problem is that "booze and ciggies" biggest cause of death is heart disease. Due to new medical procedures and drugs this is now responsible for 10% (off the top of my head) of the deaths it used to be in the 80s. Therefore although we are less healthy, the unhealthyness is now livable with.

One of the more interesting mortality seminars I've been to (yes I go to seminars explicitly on mortality - a whole day of death!) showed some stats on cause of death over the ages. The biggest reduction was heart disease and the biggest increase was "multiple causes of death". Effectively medicine is getting so good now that it now takes more than one thing to kill us off!

This also goes back to the concept of life expectancy growing faster than healthy life expectancy.

My personal view is that NHS budgetry constraints will be the most prevalent problem in keeping us living longer still so life expectancy growth will start to slow - particularly as if we have multiple ailments then we cost multiples as much to treat.

chess_010

I too would want to know how to complain against this injustice.Can complaint be made to th European courts of justice to prevent government doing this to current pensioners such as myself who has a pension scheme which is RPI capped to max of 5%

nearleyretired wrote: »

The way I read the government's proposals for company final salary schemes - one of which I am now a pensioner of - will be able to reduce the yearly increments to CPI rather than RPI.

This seems unfair to current pensioners who have no chance of making up the difference and as e.g. I understand it CPI does not take account of Council tax costs. Estimates I have seen put the difference over 10 years as much as 10 percent.

Does anyone know

• if will apply to current pensioners or to future pensioners of the schemes.
• when and how it will be phased in
• I ask this because my scheme did not increase pensions in April this year because for some reason it uses the RPI from the previous September and the RPI in September 2009 was negative. RPI is now approx 5% and CPI 3% - but last year in Sept CPI was 1%.

If anyone knows of a petition or challenge against this I would be interested to know.

chess_010

I too would want to know how to complain against this injustice.Can complaint be made to th European courts of justice to prevent government dioing this to current pensions such as myself who has a pension scheme which is RPI capped to max of 5%

Old_Slaphead

Based on stats for last 20 years the CPI/RPI difference is 0.7% or 0.56% after tax.

Over 10 years that's going to cost someone on a pension of £5000 (allegedly that's the average for the public sector) around £1250 or £125 per year.

I'm sure that if the Gov't decided to half the winter fuel payment as an austerity measure people wouldn't be getting so agitated.

cvd

such as myself who has a pension scheme which is RPI capped to max of 5%

If you are in a private scheme and the rules state RPI capped at 5%, then it may stay the same. You should contact your scheme to find out. Indeed, the proposed change to make the legal minimum payout depend on CPI means there are probably some schemes which will end out paying more in those (few) years when CPI is greater than RPI!! The Law of Unintended Consequences strikes again....

If you know that your scheme is definitely changing from RPI to CPI, then you can get an idea of the effect by doing a calculation such as the one here:
http://www.touchstoneblog.org.uk/2010/07/what-your-public-sector-pension-would-now-be-worth-if-it-had-been-linked-to-cpi/

which lists all the RPI and CPI values for the last 20 years. Just scroll down to the table of numbers. These figures are gross, before tax is removed and are based on a pension today of £5,500 which they claim is the current median public sector pension. They also just give the effect for pension income in 1 year. To get, for example the cumulative effect over 10 years, you would need to do some addition.

This table is based on historical values for RPI and CPI. Of course, nobody knows how RPI and CPI will behave in the future. However, we can be certain that RPI will, on average, be higher than CPI over a period of time because of the way the two indices are calculated. Because RPI reduces when interest rates fall and interest rates are now at a historical low, it seems likely that this table underestimates the future difference.

Your post suggests you have already retired. The difference in pension between using RPI and CPI increases with time. Hence the people who will be affected most are those who have not yet retired and who live a long time after retiring because they may have to cope with the reduction over a period of 30 years if they live into their nineties. Also, the expenses of many pensioners increase as they get older.

datostar

Just before the last General Election, on 16th March 2010, in response to queries from the Public Services Pensioners' Council (PSPC), members of the subsequent coalition Government made the following comments:-

Steve Webb on behalf of the LibDems:-
'Accrued rights would be protected and consultation over change was essential. Future changes to public sector pensions would need to be done in a timescale that would allow recipients to adjust to those changes. He specifically said that 'a pension promise made was a pension promise to be kept' and in response to a specific question on index linking said that he believed index linking to be an accrued right and therefore would be protected.'

As a result of concerns raised by the comments of Nigel Waterson, Conservative, PSPC wrote to David Cameron. A written response by Philip Hammond said, 'Indexation of pensions in payment is an established part of pension legislation. The Conservative Party has no plans to change the current index linking of public sector pensions in payment. We agree with the view that the rights to indexation of pensions already accrued is part of the accrued pension rights and those rights will be protected'.

On 22 June 2010, without any notice, debate or consultation, a single line in the emergency budget speech changed the index linking of all public services pensions.

The PSPC view is that this is a clear interference with accrued rights to the detriment of all public sector pensioners and a clear breach of the assurances given by lead members of the coalition Government within weeks of coming to power. In the short term, the effect may not be serious, but over the lifetime of a pension it will have a very significant effect both on pension income and any pension paid to a surviving widow/widower or partner.

It also seems that attempts are being made to apply similar changes to private sector schemes. Rather than embarking on another round of public sector pension bashing, might those affected consider that the the member organisations of PSPC have large memberships, are well-funded and well-organised, whereas private sector schemes tend to be smaller, more diverse and not organised together to apply political pressure in quite the same way. Should the PSPC be successful in their campaign against this change, it may well be that the private sector pensioners will also benefit.

wibbleme

Old_Slaphead wrote: »

Based on stats for last 20 years the CPI/RPI difference is 0.7% or 0.56% after tax.

Over 10 years that's going to cost someone on a pension of £5000 (allegedly that's the average for the public sector) around £1250 or £125 per year.

I'm sure that if the Gov't decided to half the winter fuel payment as an austerity measure people wouldn't be getting so agitated.

Looks like Planet Zog could use a maths teacher.

"0.7% or 0.56% after tax". Proportions don't work like that. The after tax proportion depends on how much tax you pay to start with. In real life, some pensioners hope to get a state pension as well as their occupational pension. So if we regard the state pension as a base, and say that that covers the zero-rate element of their tax bill, they pay tax on all of their occupational pension. In which case, 0.7% stays 0.7%.

More importantly, that 0.7% works cumulatively, year on year. First year, you get 99.3% of what you should have got, second year 99.3% of 99.3% i.e. 98.6% and so on. After 10 years, you are more than 7% down, and what started as £5000 (whether before or after tax) is now only £4646.74.

£353 down is a lot more than £125 down and it's where you start the next ten years.

Pensions have to last, on average, upwards of 20 years, possibly upwards of 30 years. This is where the cut really begins to bite. If you manage to survive only a bit longer than average, what started as £5000 is now worth only £4000 and it's decreasing. Index-linked, it may be, but in no sense will a CPI-indexed pension keep pace with the true cost of pensioner living. Not that RPI-indexed pensions did -- CPI is simply 0.7%p.a. further adrift from reality.

So, anyone whose savings were tied up in an index-linked pension has had at least 10% of those savings swiped by a wallpaper magnate. The crazy thing is that most of the victims, it seems, neither know nor care. They still think the ConLibDems are wonderful. Perhaps they live on Planet Zog, too.

JamesU

Old_Slaphead wrote: »

Based on stats for last 20 years the CPI/RPI difference is 0.7% or 0.56% after tax.

Could you post a link to these stats?

My feeling is that the RPI/CPI differential is higher than 0.7% over various periods that will effect pensions on an individual basis.

However even a 0.7% differential is not trivial, but rather serious. Difficult to say what inflation figures to use, so I guess use values similar to what the government purports are generally aimed for:

(i) Pension pot of £5000/yr, deferred by a 40yr old (e.g. changed job), rising in line with CPI or RPI over a 20yr period and retiring at age 60 (therefore use 0.7% as in stats over 20yrs).

(ii) Assume RPI is 3% on average, assume CPI is therefore 2.3% on average (i.e. 0.7% lower).

On retirement, compounding annual % increases over the 20yr period:

RPI: £5000 increases to £9030/yr annual pension
CPI: £5000 increases to £7880/yr annual pension

So on retirment a loss of £1150/yr or 13% of future pension.

There is another fly in the ointment i.e there appears to be an inherent discrepancy of 0.5% between the figures for RPI and CPI when they are calculated, irrespective of the inflation rate. I am less clear on this point (geometric vs arithmetic means for calculating RPI and CPI, see the link below) but if this is indeed the case, then RPI=3% and CPI=1.8% (3% less 0.7%+0.5%):

http://www.touchstoneblog.org.uk/2010/06/cpi-rpi-and-public-sector-pensions/

RPI: £5000 increases to £9030/yr annual pension
CPI: £5000 increases to £7145/yr annual pension

And a loss of £1885/yr or approx 21% of future pension.

As I do not fully understand the maths behind this additonal 0.5% differential, shall leave this to one side.

However, based on maths that I do understand, a 13% decrease in future pension is substantial. And this is using a RPI/CPI differential of 0.7% which may be too low and not applicable in all cases.


JamesU

PS: If there are errors in the maths please let me know....

Old_Slaphead

JamesU

The 0.7% figure...

http://www.independent.co.uk/news/business/comment/david-prosser-counting-the-cost-of-pensions-reform-2022087.html


The main thing it's going to affect us ALL - not just those with FS schemes but also those with S2P, Serps etc. Reistating indexing to RPI will only pass more costs onto future generations and goodness knows they'll have enough 'baby boomer' incurred debts to pay back. Those with FS schemes have done really well out of it - future employees will not get such luxuries.

The ones who are affected most are those with the biggest FS pensions - and as these have been hugely subsidised by the taxpayer (or in the case of private firms - the shareholders) then surely this is the most equitable way to spread the pain.

The reduction in pension is most pronounced after 10+ years when people tend to need less money (and remember they're still getting increases but just at a slower rate) but are consuming many more services.

The main differences, as I understand it, beteween CPI & RPI are housing costs and council tax. Many pensioners will have paid off their mortgages so will be less affected by housing cost inflation. As regards council tax - surely it is unfair to include that in the calculation of a pension increase (what next, a pension increase when the standard rate of tax or VAT goes up?). We all have to pay taxes and the fortunate with index linked pensions should not be subsidised by those who haven't.


As regards wibbleme's comments on the 0.7% - many (maybe not all) final salary pensioners will be paying tax at a marginal rate of 20% on the last bit of their pension increase. Those who don't will of course suffer a loss of 0.7%pa (but those on higher rate will only lose 0.4%).