Why not, government does this?

A controversial proposal to water down final salary pensions could save large British firms £30bn from their retirement bills, according to new research.

Eroding the amount paid to pension savers by tying them to a lower rate of inflation could act as a “safety valve” for companies struggling to meet their commitments, said consultancy LCP.

The idea of switching pension payments to the Consumer Prices Index measure of inflation, rather than the higher Retail Prices Index rate, was floated during the Tata Steel rescue talks earlier this year following a change in the law in 2011.

The state pension has been switched between targets several times. When income growth was higher than inflation inflation was the annual raise. When income growth was lower than inflation then income growth was the annual raise. And so on.

Goose and gander applies, no?

6 thoughts on “Why not, government does this?”

  1. I’m surprised most private sector funds haven’t already moved to CPI inflation. While sympathetic to companies with regards to their growing pension deficits, I trust all future rule changes also impact equally on our public sector obligations – that of doctors, teachers, the police, politicians and civil service.

  2. Unless the company is bust then benefits accrued are generally sacrosanct so changes in escalation only apply to future accruals. For the State pension no such restriction applies. Also one of the straws on the camels back for final salary schemes was government interference in stipulating the minimum rate of escalation.

  3. The issue here is with contracts. If you signed up for a pension that increases in line with RPI then that’s what you should get. If you signed up for a pension that increases with inflation as published by the government, then the Trustees can probably get away with changing from RPI to CPI if they want to (or may be able to justify staying with RPI as it’s better for the members – depends on the wording of the Trust deeds).

    If the rules are changed, then the rules in force when you leave the scheme are generally the ones that apply, although you may have some elements of benefit that get RPI and some that get CPI in some cases.

  4. The CPI should be used rather than the RPI, it’s more accurate. The Carli method used by the RPI produces an inflation figure that’s too large. I don’t understand why it has been used for so long, Fisher demonstrated the problems with it in the early 20th century.

    I think the other are probably correct about contracts. On the other hand, where I live in Ireland my final-salary pension was converted to a defined contribution pension.

  5. Company pension schemes are paid for by the company and have to cover all their costs from earnings, one way or another.

    State pensions just send the bill to the taxpayer.

    So no, goose and gander does not apply.

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