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Friday 9th July 2010
Plan to change private pension inflation link
The government wants to change how some private sector pensions are calculated.
The proposals mean millions of people would be likely to see lower increases to their pensions in retirement.
Pensions minister Steve Webb said there were plans to link pension payments to the typically slower-growing Consumer Prices Index (CPI) measure of inflation instead of using the RPI.
Accountants KPMG said this could reduce UK private sector pension liabilities by 10% or about £100bn.
People in dormant and occupational schemes would be affected.
The existing system ties pension increases to the Retail Prices Index (RPI) which includes housing costs such as mortgage interest payments.
The CPI is typically lower - and over the past 20 years it has been higher than the RPI only three times.
KPMG also said the changes could lead to a "smallprint lottery", as individual schemes might have different legal rules.
Changes
In the Budget, Chancellor George Osborne said that most benefits and public sector pensions would be linked to the CPI - potentially saving the government millions of pounds.
In a written ministerial statement, Mr Webb - a Liberal Democrat - said that the same should be true of occupational pensions.
"The government believes the CPI provides a more appropriate measure of pension recipients' inflation experiences and is also consistent with the measure of inflation used by the Bank of England," he said.
"We believe, therefore, it is right to use the same index in determining increases for all occupational pensions and payments made by the Pension Protection Fund and Financial Assistance Scheme."
This would mean that some companies would immediately see some pressure taken off them with regards to their pension liabilities, and might choose to keep their pension schemes open.
But individuals would be likely to see that, in the future, their pension incomes grew more slowly.
During their time in opposition, the Conservatives argued that pensioners were the "forgotten victims" of the recession, with the inflation rate for the state pension falling behind the rising cost of necessities such as food.
Source: BBC News