Switching to the CPI on private pensions

Two things I really don\’t understand here:

Pensions minister Steve Webb said there were plans to link pension payments to a lower measure of inflation.

It would be applied to all final salary pensions, as well as payments made by the Pension Protection Fund – a lifeboat fund for workers who have lost their pensions – and the Financial Assistance Scheme, a Government compensation scheme.

The existing system links pension increases to the Retail Prices Index which includes housing costs such as mortgage interest payments.

But the Government plans to link it to the Consumer Prices Index instead, which is typically lower.

The move would reduce the burden on pension schemes and is expected to be introduced next year.

Firstly, is it really within the government\’s power to determine which inflation adjustment is made in a private contract?

Secondly, and I realise that I must be in gross error here, I thought that most/all private sector pensions were not inflation adjusted?

7 thoughts on “Switching to the CPI on private pensions”

  1. Well, my one ‘final salary’ private sector pension is inflation adjusted – clearly, for my various money purchase ones it will depend on the contract for the annuity.

    But the “rule of law” point is valid …

  2. My private pension used to promise what I had always been told was a link to RPI. It turns out, however, that what it actually promises is inflation protection of the sort offered by public sector pensions. So it may be legit to swap to CPI-linking when the Public Pensions do. What a bugger!!!! Moreover, the trustees are considering capping the index-linking at 5% per annum. What the justification for that is – apart from fear of the scheme’s failure – I do not know.

  3. 1. It lowers cost for businesses in time to come (less to pay in pensions = more profit and/or cheaper product)

    2. It will strengthen their position for the coming fight with the unions over public sector pensions.

  4. Apparently (so I heard on the radio) a lot of pension trust deeds refer to an order made under a certain section of a certain Pensions Act for the purposes of indexation.

  5. Speaking solely of DB pensions (final salary, career average earnings and the like), the rules are (iirc):

    Non-GMP pensions that were deferred after 1/1/86 (i.e. a member contributed to a pension scheme and left the scheme after 1/1/86) must be increased by at least the lower of 5% per annum or price inflation.

    The pensions don’t get increased as long as you’re still paying into them (as they’re tied to your salary).

    GMP (Guaranteed Minimum Pensions – which you get some of if you’re contracted out of S2P) increases will depend on exactly how the scheme is structured, but most I’ve seen use fixed rate revaluation, which means that the rate is fixed based on your date of leaving. It can be as much as 8.5% p.a. (for leavers prior to 6.4.88) and is currently 4% p.a.

    Going from memory here, if you left your pension scheme during 1985, you have to get indexation on the benefits accrued from 1.1.85, and if you left prior to 1.1.85 you don’t have to get any indexation (except on any GMP).

    When the government says it will change the inflation rate that’s used, they mean they’ll change the minimum that must be used. Some schemes are more generous than this (although not all that many, as it’s getting quite expensive).

  6. Sorry, my bad. They didn’t make revaluation completely back-dated until 1.1.1991. So the situation was:

    left pre 1.1.85 – no mandatory revaluation (except GMP)
    left 1.1.85 to 31.12.90 – revaluation on service after 1.1.85, but not on service before.
    left 1.1.91 onwards – revaluation on all service.

    Of course some schemes introduced full revaluation earlier, and some pay more than the minimum.

  7. My pension is increased by RPI every year but with a 5% cap – that is presumably so that if inflation really kicks up, it’s the members that go broke rather than the fund. I suppose one can’t really argue with that, given that it’s all fully funded and supported by investments (ie we don’t get to send the bill to the taxpayer, like some people I could mention).

    But afaik this is a private contract freely entered into, between myself and the pension fund.

    So where does the damn gubmint get the right to change the terms after the event?

    If they can do this, what else can they do to screw us?

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