Annual increase and CPI

glynny

I like many others have been given a 0.5% increase to my pension and when asked, why so low, I was told it was in line with CPI.

I have noticed a massive increase in costs for basic living mostly around circa 5-9% in real terms.

so, could you please explain why CPI is calculated on such a low basis and is not tracking reality.
I have contacted my pension providers who refuse to explain.
I look forward to your responses.

Many thanks in anticipation
glyn

Bravepants

Have you checked the point in time used by your pension provider to assign the CPI rate to your pension increase?

For example, my pension provider uses September's value from the previous year (it might actually be the average over the previous 12-months I should check). 

Anyway take a look at this link:

https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/september2020

As you can see from the above link, the 12-month average value in September last year was 0.5% (last bullet point of section 1. Main Points).  

Lucky they didn't use August's value eh?

Moonwolf

CPI is the governments preferred measure of inflation.  It is a weight of different factors and will rarely match your personal inflation rate.
It uses a basket of goods and also includes a high weighting (33% I think) for housing.
Many pensions are explicitly tied to CPI, obviously they have to use a figure and to be fair the same one for everyone. and the government preferred measure is usually the one they pick.
The problem for pensioners is that if they aren't renting and have paid off the mortgage, housing cost changes won't affect them much but they are probably more impacted by energy and basic food costs. I'm guessing that during the pandemic housing costs have gone down while food and energy has gone up.
There isn't a lot you can do about this but hope that housing costs go back up and push up CPI higher than your personal inflation rate in future years.

1813

I’m 39 and when I get to 68, a good chance I’d be renting so if the costs are going up by as much as 9%, for example, just for arguments sake, if that applied to rent, that’s astronomical. Most rents go up by no more than 5% isn’t it, per year? I wouldn’t imagine that trend change much as it’d be a very high change, at 9%. To be honest, with 30 years left to retirement, best part of, all I really need to worry about as a bare minimum is if I have a roof over my head and can put food on the table and based on historical data, that shouldn’t be an issue. At the moment, I just have db pots. I have no dc pot, so my db pots (I include state pension as one as essentially it is), at just under 10000 a year, so if anyone could hazard a guess as to what 10000 might be worth in 30 years is anyone’s guess because although we have these fancy predictive calculators to help, that is again, what they are. Predictions. So I am genuinely concerned if at 68 if I will be ok as we don’t know the future and can use only past trends and assumptions from that to determine our status at retirement. 

Linton

glynny said:

I like many others have been given a 0.5% increase to my pension and when asked, why so low, I was told it was in line with CPI.

I have noticed a massive increase in costs for basic living mostly around circa 5-9% in real terms.

so, could you please explain why CPI is calculated on such a low basis and is not tracking reality.
I have contacted my pension providers who refuse to explain.
I look forward to your responses.

Many thanks in anticipation
glyn

I monitor my spending at a detailed level.  Those details dont show a massive increase in costs over the past year.  Taking the past 10+ years  CPI looks a reasonable approximation.

squirrelpie

Moonwolf said:

CPI is the governments preferred measure of inflation.  It is a weight of different factors and will rarely match your personal inflation rate.
It uses a basket of goods and also includes a high weighting (33% I think) for housing.
Many pensions are explicitly tied to CPI, obviously they have to use a figure and to be fair the same one for everyone. and the government preferred measure is usually the one they pick.
The problem for pensioners is that if they aren't renting and have paid off the mortgage, housing cost changes won't affect them much but they are probably more impacted by energy and basic food costs. I'm guessing that during the pandemic housing costs have gone down while food and energy has gone up.
There isn't a lot you can do about this but hope that housing costs go back up and push up CPI higher than your personal inflation rate in future years.

Maybe it would be worth your while to look at the link Bravepants provided and follow on to https://www.ons.gov.uk/economy/inflationandpriceindices/datasets/consumerpriceinflation where you can see the actual breakdown.

There you would see that CPIH is the index that includes housing costs with a weighting of 33%. CPI itself does not. Both of the indexes also include all fuels for the house in those percentages. Food is also of course included as a separate item. No need to guess about what's happened, BTW. Just look at the published figures.

TVAS

RPI and CPI are both rackets. 
CPI does not include Council tax, mortgage interest payments, house depreciation, buildings insurance, ground rent, solar PV feed in tariffs and other house purchase cost such as estate agents' and conveyancing fees.
I think it is the Bank of England who change the measure of both CPI and RPI but I think it is manipulated to suppress wage rises.
Schemes adopted CPI in approx 2010 to reduce their liabilities for pension schemes which are considerable. This strategy was probably chosen rather than reducing pension benefits accrued.
People always talk about those on benefits scrounging etc however the biggest part of the Welfare bill is pensions.
We also have low interest rates. I cannot see them going back to 'normal' i.e. 5% bank base rate any time soon. 
Leaving Europe has increased the costs of construction materials, food, delivery. 
What is sad as that the Provider could not explain which probably means they employ people who do not read the financial press so they don't know. Why didn't you pursue it? I would have. COMPLAIN.     
 

Albermarle

 have noticed a massive increase in costs for basic living mostly around circa 5-9% in real terms.

This is probably more perception than reality . The public always think prices are going up more than they actually are, because the human mind tends to focus on the prices that go up, and forget about the other items that have gone down.

Having said that I suspect that 0.5% is probably a statistical minimum, and todays inflation might be a bit higher than that. 

Moonwolf

squirrelpie said:

Maybe it would be worth your while to look at the link Bravepants provided and follow on to https://www.ons.gov.uk/economy/inflationandpriceindices/datasets/consumerpriceinflation where you can see the actual breakdown.

I think I must have been typing my response when Bravepants posted as it wasn't there when I started my reply. Sorry, clearly I am wrong about the detail. 
Hopefully, the principle is valid though, personal inflation rarely matches any standard inflation measure, unfortunately you can't do much about it except hope that trends even out over time.
That and a badly timed stock market crash are the two things that are stopping me take an early retirement.

eskbanker

Bravepants said:

Have you checked the point in time used by your pension provider to assign the CPI rate to your pension increase?

For example, my pension provider uses September's value from the previous year (it might actually be the average over the previous 12-months I should check). 

Anyway take a look at this link:

https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/september2020

As you can see from the above link, the 12-month average value in September last year was 0.5% (last bullet point of section 1. Main Points).  

Lucky they didn't use August's value eh?

Just to clarify, index-linking doesn't involve any averaging as such, and simply compares the value of an index with the equivalent value a year earlier, so, as shown in the table in section 2, CPI was 108.5 in September 2019 and 109.1 in September 2020, and hence the increase was 0.5%.

Bravepants

eskbanker said:

Bravepants said:

Have you checked the point in time used by your pension provider to assign the CPI rate to your pension increase?

For example, my pension provider uses September's value from the previous year (it might actually be the average over the previous 12-months I should check). 

Anyway take a look at this link:

https://www.ons.gov.uk/economy/inflationandpriceindices/bulletins/consumerpriceinflation/september2020

As you can see from the above link, the 12-month average value in September last year was 0.5% (last bullet point of section 1. Main Points).  

Lucky they didn't use August's value eh?

Just to clarify, index-linking doesn't involve any averaging as such, and simply compares the value of an index with the equivalent value a year earlier, so, as shown in the table in section 2, CPI was 108.5 in September 2019 and 109.1 in September 2020, and hence the increase was 0.5%.

OK, I see, my bad. But the value of CPI 12-month rate of 0.5% in September was "possibly" used to increase the OP's pension though. I have used the analogy that Civil Service pensions are uplifted using the figure from the previous September, so I was using September as the example.