Cpi - rpi Final Salary Schemes

cvd

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

The difference is, on average, about 0.7%-0.75% per annum. Of this about 0.5% is due to the formula effect and the rest is due to the fact that the CPI includes some things the RPI does not and the RPI includes some things the CPI does not.

The calculation on the Touchstone blog which I listed above is good for showing the historical effect.

http://www.touchstoneblog.org.uk/2010/07/what-your-public-sector-pension-would-now-be-worth-if-it-had-been-linked-to-cpi/

This table includes the effect of the recent dramatic fall in interest rates to an all-time low - this fall has caused the RPI to fall dramatically. Hence it almost certainly underestimates the future size of the difference between CPI and RPI over the next few years. The table gives 8.4% difference for the last 10 years; a reasonable guess looking forward is 10% over the next 10 years. This assumes interest rates recover to a modest level during that period.

The difference per annum is not huge. However, over a period of 20-30 years it would be substantial and many people will live for 20-30 years after retiring.
I believe some pension schemes will now use CPI for indexing deferred pensions and for indexing CARE (career average) schemes. In those cases, the effect could be compounded over many more years (possibly 70 years) and the effect at the end of that period would be enormous.

If the government no longer uses the RPI perhaps they will save some money by no longer calculating it - this would be a very good way to stop all complaints in the future when RPI is much larger than CPI. But what then happens to all those people with money purchase pensions who have bought an annuity which increases with RPI? Tough - they will also be shunted on to the CPI. The precedent has been set.

JamesU

cvd wrote: »

The difference is, on average, about 0.7%-0.75% per annum. Of this about 0.5% is due to the formula effect and the rest is due to the fact that the CPI includes some things the RPI does not and the RPI includes some things the CPI does not.

The calculation on the Touchstone blog which I listed above is good for showing the historical effect.

http://www.touchstoneblog.org.uk/2010/07/what-your-public-sector-pension-would-now-be-worth-if-it-had-been-linked-to-cpi/

Thanks for this. Saw the blog in a google search some time ago but did not realise it had a good example comparing RPI/CPI and values in a specific month. I could run various figures forever, but no point really, as each individual's circumstance is different. However in general it is fairly easy for me to see and quantify that a 0.7% - 1.0% incremental loss each year due to a switch to CPI reduces a pensionable income in the range of 10-15% over 20 years. Interestingly, in the case of a deferred pension over 20 years followed by 20 years of retirement (using figures in my previous post above), calculations show that at the end of the period a 0.7% differential reduces the pension income by approximately 25% relative to using RPI. Exactly the point you made on the impact of switching to CPI over a 20-30yr retirement period.

For those public and private sector workers that have already paid into final salary schemes for retirement, the switch from RPI to CPI makes a marked difference and obviously it will effect those on modest pensions most of all in the long term. Poorly conceived and legislated theft by the Government. Pretty outrageous stuff.

JamesU

unclewaz

I would gladly sign such a petition too! It would appear the goalposts are being shifted quickly!:mad:

JamesU

unclewaz wrote: »

I would gladly sign such a petition too! It would appear the goalposts are being shifted quickly!

I think clarity is needed from the Treasury on more specific intentions with final salary schemes before any implications can be fully understood. As OPs have already mentioned, there may be a plethora of legal and contractual issues to consider between pension trustees, pension regulator and Treasury once things become clearer.

The article below is a nice summary of recent events and some of the legal considerations. For those interested, worth a read:

http://www.pitmans.com/news/cpi-pension-increases


JamesU