Cpi - rpi Final Salary Schemes

markr007

Around half the difference between RPI and CPI is a formula effect that will always exist. However, the other half is largely housing costs that may be added into CPI in the next couple of years. The difference might well therefore be more like 0.3-0.4% pa overall and arguably the CPI formula is more reflective of reality (it effectively assumes a move to lower priced alternatives when prices rise).

JamesU

Old_Slaphead wrote: »

JamesU
The 0.7% figure...
http://www.independent.co.uk/news/business/comment/david-prosser-counting-the-cost-of-pensions-reform-2022087.html

Thanks for this link.

JamesU

wibbleme

Old_Slaphead wrote: »

JamesU

The 0.7% figure...

Sorry as a new user you are not allowed to post with links.

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%).

I'm glad I don't live on Planet Zog. Looks like it's a lot more than the maths that's faulty there.

On the United Kingdom of planet Earth, there are working people and their employers who have between them been paying 20-30%, sometimes even more, of their salary for RPI-linked pension entitlements (in addition to paying for the pensions of the previous generation in the state "Pay-As-You-Go" scheme through a "National Insurance" that has taken another 10% from their pay packets and even more from their employers). The pension funds and the government that were happy to take those contributions in the past must live up to the bargains they made.

By the way, there is no reason that those who are willing to make that level of contribution now or in the future should not receive similarly decent pensions in their retirement. All it takes is an appropriate level of contribution in employment. Our main problem at present is a financial services industry that is happy to give the impression to the young and gullible that nominal monthly contributions plus "the magic of compound interest" will produce a decent retirement income. This, a climate of "I want it all; I want it now", and goverment actions that reduce confidence in all aspects of both public and private pension schemes are giving the impression it is not possible to save for the future. It is; but you have to give up something now in order to have something later. Simple.

Whether public or private sector, those index-linked pensions I mentioned have been paid for by the workers involved, some as part of their employment contracts, and in many cases by putting additional hard cash into those schemes. Those workers are entitled to the deal they signed up to. If that deal was protection against cost-of-living inflation as measured by RPI, that's what they should get -- no more and no less. How they choose to spend their pensions once they get them has no bearing on this. Nor does whether they worked on below-average wages as nurses in the NHS, firefighters at a local authority, bin collectors in an outsourced private utility, or computer programmers in a bank. That was the package they and their employers agreed to.

By the way, Planet Zog must be a strange place. It seems that retired folks are the ones who produce children -- here, at least, it's education that accounts for the largest share of local authority expenditure. So it must be the long-retired pensioners that are consuming those services. I guess, too, that either no Planet Zog pensioners rent houses or there is a housing rental sector in which the interests of tenant and landlord are fairly balanced and elderly folk can't be turfed out of their homes with only two months' notice if they refuse to accede to extortionate increases in rents.

Planet Zog is a obviously a very different place to Planet Earth. It looks like the sort of place where they ignore facts when they get in the way of specious self-serving arguments. The sort of place where contracts are broken with impunity, even by governments. I don't think any of us have plans to go there anytime soon. Even if the Brokeback Twins are trying to persuade us we should.

cvd

Around half the difference between RPI and CPI is a formula effect that will always exist. However, the other half is largely housing costs that may be added into CPI in the next couple of years. The difference might well therefore be more like 0.3-0.4% pa overall and arguably the CPI formula is more reflective of reality (it effectively assumes a move to lower priced alternatives when prices rise).

Is this actuarial arithmetic? So 0.5 is roughly one half of 0.75. The ONS says the formula effect accounts for 0.5%. It is on their web site. And did you know that the weights in the RPI are adjusted each year to reflect different buying patterns?

Why or why do people not just look at the purposes of these 2 inflation measures? The purpose of the RPI (often called the CPI in other countries) is to measure inflation for all households except the very rich and pensioners and those in homes/institutions. The CPI (called the harmonised CPI in other EU countries) is a uniform measure of inflation used for comparing inflation between countries in the EU (Maastricht Treaty and introduction of the Euro). The content of the CPI is determined by EU regulation and many compromises are necessary in its construction because of different circumstances in different countries.

Of course, the question then is: Does the RPI reflect the inflation experiences by pensioners because they are not in the extensive sampling carried out by the ONS for the RPI? And the answer is yes! See the study by the Institute of Fiscal Studies here:

http://www.ifs.org.uk/comms/comm106.pdf

Over the whole period between 1977 and 2008, average inflation for pensioners (5.8 per
cent) has been virtually the same as that for non-pensioners (5.9 per cent)

This study also found that inflation of pensioners tends to rise with age.

PS
1. The actuarial profession has a great deal of responsibility for the current pensions mess.

2. Statements by Osborne and Webb on comparing the issue of the CPI versus RPI are clearly false. You only need to read the technical documents by their own government statisticians.

molerat

I calculated that my AFPS pension would have left me almost 14% worse off using CPI as opposed to RPI after the age 55 increase. Can we ask the MP's to take a 14% paycut

Old_Slaphead

molerat wrote: »

I calculated that my AFPS pension would have left me almost 14% worse off using CPI as opposed to RPI after the age 55 increase. Can we ask the MP's to take a 14% paycut

How do you know the future difference between CPI & RPI ?

CPI can be sometimes be higher

Old_Slaphead

wibbleme wrote: »

Planet Zog is a obviously a very different place to Planet Earth. It looks like the sort of place where they ignore facts when they get in the way of specious self-serving arguments. The sort of place where contracts are broken with impunity, even by governments. I don't think any of us have plans to go there anytime soon.

Precisely which facts am I ignoring?

Self serving - hardly.....like most people I will be adversly affected by these changes. Seems to me that for the vast majority on low payouts the cost will not be huge and be most pronounced in very old age when income requirements are lower. There's a massive pensions aparthid at the moment and those with hugely subsidised arrangements (esp. those, mainly public servants, who get very beneficial early retirement options) are going to have to get used to the fact that the real world out there has changed.

All Governments break 'contracts' - look at (a) Brown's £5bn tax raid on private pensions - that was hardly fair given the precedent on tax treatment set in previous decades and (b) the continual degradation on the S2P/Serps/SGP arrangements.

Simple fact is people are living a lot longer and many pensions are unaffordable under current rules.

Three comments/observations on your posting....
1 AFAIK private employers are not being forced into CPI indexing if their scheme rules specify otherwise
2 If all public schemes incl S2P & Serps were RPI indexed then who picks up the extra (as opposed to CPI) cost? (clue - it won't be the Government or the 'fat cats')
3 Do the schemes which are being adversly affected actually specifiy a linkage to RPI or to just some unspecified inflation index ?

JamesU

Old_Slaphead wrote: »

How do you know the future difference between CPI & RPI ?
CPI can be sometimes be higher

Of course nobody knows future rates, "please be aware that past performance is no indicication of future performance......"

However, the last 20yrs is probably a reasonable estimate as to what the RPI/CPI differential will be in the future over long periods, and I have no idea what other approach could be adopted. If this assumption is correct, as in my post above, the switch to CPI will reduce annual increments by 1.2% each year over a 20yr period and will lead to a 20% reduction in retirement pension.

If anybody else has suggestions on how to quantify the impact of the proposed CPI switch on future pensions, or how the calculations should be ammended if they are not correct, please post as I am just trying to understand this objectively.

Concerning stats and data, does anybody know of a better source (non-newspaper) for confirming that CPI is 0.7% lower than RPI on average over 20yrs? Would like to see how this average is calculated. Also on ONS I have not been able to find monthly CPI figures for the last 20yrs, only quarterly so far. Any idea where I can find monthly CPI figures (I have monthly RPI)? Relevant to excel calculations as many pensions increase in line with RPI on a specific month in each year rather than on an annual or quaterly average.


JamesU

molerat

Old_Slaphead wrote: »

How do you know the future difference between CPI & RPI ?

CPI can be sometimes be higher

This is based on past performance 1994 - 2009.

6 years since 1989 and then generally only just above RPI. When below RPI it has been well below.

Over the 15 years,1994 - 2009, my pension rose by an average of 2.92% pa. CPI rose by an average of 1.92% pa.

JamesU

cvd wrote: »

The ONS says the formula effect accounts for 0.5%. It is on their web site. And did you know that the weights in the RPI are adjusted each year to reflect different buying patterns?

Thanks for the prompt, proper reference to the 0.5% formula effect found. It is in the ONS technical manual 2010 as in link below, page 92, Section 9.4.1, paragraph 2.

http://www.statistics.gov.uk/downloads/theme_economy/CPI_Technical_manual-2010.pdf


So it looks like an estimated differential of 1.2% compounded annually when switching from RPI to CPI.


JamesU