DB Inflation protection myth ?

Phossy

I have a deferred Final Salary pension which has 'lost' approx 23% over the last 10 years versus the growth that you would expect if it was fully protected against inflation (+41%). My Pension has a 5% CAP, so I understand that would not protect me well for a couple of recent years, however, that doesn't account for the full difference. This last year is a good example - CPI figures set in September 2024 was 1.7%, but that was an absolute minimum for the year, probably about half of what was seen across the year. Made me wonder if  CPI for a pension was set on a specific date, whether they have flexibility in moving that date to benefit the fund, would it be fairer to have and average figure over the year etc.. Anyone have any insights or thoughts on this?
For reference CPI ANNUAL RATE 00: ALL ITEMS 2015=100 - Office for National Statistics

MeteredOut

What has 'lost' 23%? The amount you're projected to get each year, or the CETV?

If the projected amount, the variances of CPI should balance out over the years. So even if it is 1.7% for for the year to Sep 2024, the year to Sep 23 before that will have included any higher inflation periods.

Can you give specifics of your -23% and +41% calculations?

Ayr_Rage

Phossy said:

I have a deferred Final Salary pension which has 'lost' approx 23% over the last 10 years versus the growth that you would expect if it was fully protected against inflation (+41%). My Pension has a 5% CAP, so I understand that would not protect me well for a couple of recent years, however, that doesn't account for the full difference. This last year is a good example - CPI figures set in September 2024 was 1.7%, but that was an absolute minimum for the year, probably about half of what was seen across the year. Made me wonder if  CPI for a pension was set on a specific date, whether they have flexibility in moving that date to benefit the fund, would it be fairer to have and average figure over the year etc.. Anyone have any insights or thoughts on this?
For reference CPI ANNUAL RATE 00: ALL ITEMS 2015=100 - Office for National Statistics

How would you pick the date for the previous 12 months average?

Moving the date to benefit the fund would mean picking the lowest inflation rate, that means the increase costs the fund less and protects it for longer to the detriment of those already being paid pensions/deferred pensioners.

Edit : If your scheme uses the September figure for increases, then it was a winner !

Phossy

MeteredOut said:

What has 'lost' 23%? The amount you're projected to get each year, or the CETV?

If the projected amount, the variances of CPI should balance out over the years. So even if it is 1.7% for for the year to Sep 2024, the year to Sep 23 before that will have included any higher inflation periods.

Can you give specifics of your -23% and +41% calculations?

Projected. 
From the ONS you can see price index is 1.42 (so 42%) - with average over the 10 years of 3.54%.
My projections since that time has grown 19% 

DRS1

For deferred pensions the 5% cap doesn't just work on a year by year basis.  So just because CPI was say 8% in one year doesn't mean you "lose" all of the 3% by which CPI exceeded 5% in that year.  

This page has a nice picture illustrating the point
RRECSPS Deferred Revaluation Guide 2025

eskbanker

Phossy said:

This last year is a good example - CPI figures set in September 2024 was 1.7%, but that was an absolute minimum for the year, probably about half of what was seen across the year. Made me wonder if  CPI for a pension was set on a specific date, whether they have flexibility in moving that date to benefit the fund, would it be fairer to have and average figure over the year etc.. Anyone have any insights or thoughts on this?

Using averages in that way defeats the point of indexation!  Bearing in mind that you're apparently not recognising the distinction between CPI itself and its annual rate of change, anything indexed is always going to track the index when calibrated to use the same reference month each year.

In other words, if CPI has increased by 42%, then an uncapped pension indexed to that will also have increased by 42% (if measured over exactly the same period), whereas using some sort of averaging system could give a higher or lower figure but would be arbitrary and hard to argue as 'fairer'.

michaels

It should be noted that any time the cap does cut in then future year increases are based off the lower real terms amount resulting form the cap so the imposition of the cap in an early year has an increasingly large impact as time goes on.

eskbanker

michaels said:

It should be noted that any time the cap does cut in then future year increases are based off the lower real terms amount resulting form the cap so the imposition of the cap in an early year has an increasingly large impact as time goes on.

Surely it has to be that way, otherwise the effect of the cap would simply be unwound in subsequent years?

Phossy

DRS1 said:

For deferred pensions the 5% cap doesn't just work on a year by year basis.  So just because CPI was say 8% in one year doesn't mean you "lose" all of the 3% by which CPI exceeded 5% in that year.  

This page has a nice picture illustrating the point
RRECSPS Deferred Revaluation Guide 2025

Cuts both ways. My my point is that I have seen an approx 1.8% growth in my (5%) capped pension over 10 years versus ~ 3.5% CPI growth annually on average. Doesn't feel quite right.

Marcon

Phossy said:

I have a deferred Final Salary pension which has 'lost' approx 23% over the last 10 years versus the growth that you would expect if it was fully protected against inflation (+41%). My Pension has a 5% CAP, so I understand that would not protect me well for a couple of recent years, however, that doesn't account for the full difference. This last year is a good example - CPI figures set in September 2024 was 1.7%, but that was an absolute minimum for the year, probably about half of what was seen across the year. Made me wonder if  CPI for a pension was set on a specific date, whether they have flexibility in moving that date to benefit the fund, would it be fairer to have and average figure over the year etc.. Anyone have any insights or thoughts on this?
For reference CPI ANNUAL RATE 00: ALL ITEMS 2015=100 - Office for National Statistics

There's never been any suggestion that a deferred pension would be fully protected against inflation, so this isn't a 'myth' so much as a 'myth-understanding'.

Revaluation provides some degree of protection related to inflation. Specific dates are used each year. Trustees/employers can't just merrily chop and change these.

seacaitch

michaels said:

It should be noted that any time the cap does cut in then future year increases are based off the lower real terms amount resulting form the cap so the imposition of the cap in an early year has an increasingly large impact as time goes on.

But multiplication is commutative, so it doesn't matter whether a cap occurs in the 1st year or the final year (or any year between).