Is RPI Changes To DB Pension The Next Misselling Scandal

Black_Cat2

I think this change may already have taken place for my OH but if anyone can help please:

Originally in previous statement my OH was told benefits above GMP will increase by the cost of living  in the UK or 5% a year compound, whichever is lower.

Latest statement now says it increases by Sept CPI capped at 5%.

My question(s) here is am I right in thinking that he is worse off now?  Sept CPI is 0.5% - I believe from a Google search.  Does this mean his non-GMP will only increase by 0.5% for the whole of the year?  His figure is not much, just around the £2000 mark, so will it only go up by £2000 x 0.5% = £2010, £10 for the year?!?

Is 0.5% because of the Covid situation and usually will it be higher? 🥴

I'm not the sharpest tool in the box but I'm trying to learn lol, thanks in advance...

NottinghamKnight

Cost of living is a subjective term, this could be RPI, CPI or any other reasonable measure of inflation, it sounds as though they have decided to be definitive in their measure on what is typically a lower, but not unreasonable, measure of inflation. If that measure is used as a benchmark for the year then that will be the annual increase, after all the commitment is to match their measure of cost of living increase which is what they are doing, let's not forget many people are getting no pay rises, many have taken a 20% cut due to furlough and job losses are increasing after all.

Linton

Black_Cat2 said:

I think this change may already have taken place for my OH but if anyone can help please:

Originally in previous statement my OH was told benefits above GMP will increase by the cost of living  in the UK or 5% a year compound, whichever is lower.

Latest statement now says it increases by Sept CPI capped at 5%.

My question(s) here is am I right in thinking that he is worse off now?  Sept CPI is 0.5% - I believe from a Google search.  Does this mean his non-GMP will only increase by 0.5% for the whole of the year?  His figure is not much, just around the £2000 mark, so will it only go up by £2000 x 0.5% = £2010, £10 for the year?!?

Is 0.5% because of the Covid situation and usually will it be higher? 🥴

I'm not the sharpest tool in the box but I'm trying to learn lol, thanks in advance...

The above GMP portion is intended to provide a level of income that can buy the same amount of goods each year so it will increase in line with prices.  Prices have risen very little this year, if at all. partially because of Covid and partially because of general economic circumstances.

Therefore the increase in the pension is very little, in this case 0.5% or £10 in your husband's case.  He should be no better or no worse off in terms of the goods he can buy.

Black_Cat2

Ty @Linton but I'm a little confused.  If his pension only increases by as little as £10 a year (or thereabouts) then doesn't it seem wise to look into transferring it when he's 55 to earn much better rates elsewhere.  I see some peeps get slated here for suggesting it... but is it not so crazy? 

molerat

Some of us were stitched up with RPI to CPI change several years ago even though my booklet says RPI.

AlanP_2

Black_Cat2 said:

Ty @Linton but I'm a little confused.  If his pension only increases by as little as £10 a year (or thereabouts) then doesn't it seem wise to look into transferring it when he's 55 to earn much better rates elsewhere.  I see some peeps get slated here for suggesting it... but is it not so crazy? 

I see the difference as you MIGHT getter better returns by transferring out of a DB scheme but then again you MIGHT NOT.

Anyone who transferred out and invested a substantial sum at the end of 2019 wouldn't have thought returns were better in Feb / March 2020. The vast majority of pots have no doubt recovered but that wasn't a guaranteed outcome in March.

With a DB scheme you KNOW what you will get and you KNOW what the rate of increase will be.

The rules / legislation might change as proposed re RPI to "New RPI" linking, but equally the rules / legislation that relate to DCs might change at some stage. 

Malthusian

molerat said:

Some of us were stitched up with RPI to CPI change several years ago even though my booklet says RPI.

What the scheme rules say is what matters (e.g. whether they specify RPI or only "inflation"). The booklet was probably accurate at the time.

Black_Cat2 said:

Ty @Linton but I'm a little confused.  If his pension only increases by as little as £10 a year (or thereabouts) then doesn't it seem wise to look into transferring it when he's 55 to earn much better rates elsewhere.  I see some peeps get slated here for suggesting it... but is it not so crazy? 

You only get much better rates if you take much more risk, and the guarantees under a DB scheme are so attractive that transferring to a DC pension to take all the risk yourself is considered unsuitable in 9 out of 10 cases by the regulator.

Most people won't take investment risk even when the alternative is to leave their money rotting in a bank account paying significantly lower than inflation. Giving up something that pays a guaranteed income much higher than you can possibly get on the market, linked to inflation, for your entire lifetime no matter how long that is, is on a completely different planet in terms of risk compared to giving up 0.1% in an FSCS-protected bank account. Basically you have to be crazy, relative to what the general population considers to be sane. Note that that's not the same thing as "a bad idea". Packing in your 9-to-5 to start your own business or running an ultramarathon are other examples of crazy.

xylophone

Some of us were stitched up with RPI to CPI change several years ago even though my booklet says RPI.

Your booklet may well have said this because at the time it was produced, this was the official inflation measure.

However, the scheme rules (to which the Trustees must adhere) may not have referred specifically to RPI but to "such measure of inflation as may be  in force......" or something equally vague. That is to say, RPI was not "hard wired" into scheme rules.

Even where it was hard wired, pensioners with GMP could still be short changed because  although their excess pension would increase under scheme rules, their GMP (previously linked to RPI) would increase only by CPI.

Mickey666

daveyjp said:

How is using RPI 'inflation busting' when its an actual measure of inflation?  Inflation busting would have to be RPI plus x%!

More to the point, not all DB pensions have annual increases, RPI or otherwise, as they are at the discretion of the plan trustees.

I understand there was some change in the law in 1997 about this, though I'm not clear about the details.  I know it's a contentious issue and that there have been campaigns to change the law to force annual increases where they are currently discretionary.

Sandtree

Brynsam said:
We are a decade away from this proposal being implemented - lots of other things could change in the next decade. Neither pension schemes nor those giving financial advice can be held responsible for the government doing something which tilts the playing field. Now the idea has been floated, doubtless advisers will take it into account before advising individuals not to transfer.

The whole “miss selling” aspect of this thread is clearly a bit of a red herring when it comes to DBs.

You clearly cannot blame an FA for what the government does but as you say there is now a probable need for advisors to take it into consideration. Whats interesting, to me at least, for the last decade in financial services there has been discussion of when there are material changes in RPI and/or RPI is dropped (and it was a “when” not an “if”) conversation. Indeed a number of reinsurance treaties I’ve been party to doing the deal on have certain clauses that will react to this scenario and go beyond the token “or whatever replaces it” type clause as lawyers inevitably tag onto the end of things like currencies or indexes etc.

So whilst the timeline has only just been proposed, certainly in large finance companies this isnt new news just the start of a timeline appearing. Should advisors have known this too and possibly at least acknowledged the possibility but put it in the too hard to assess category because of the unknown timescale.