Private Sector Pensions May See Stealth Cut

Proposed pension cuts could be close to 10%.

Proposed pension cuts could be close to 10%.

Millions of people are likely to see their retirement pensions lowered.  Pensions minister Steve Webb wants to link pension payments to the usually lower Consumer Price Index (CPI) instead of the Retail Prices Index (RPI).  This has the potential of lowering private sector pension expenses by 10% or 100 billion pounds.

In the history of comparing both the CPI and RPI, the CPI is usually lower.  The CPI has only been higher 3 times.  The CPI excludes many factors that are considered by many to be necessary for a minimum standard of living and allow for participation in society, such as mortgage interest payments and transportation costs.

Chancellor George Osborne presented his budget connecting benefits and public sector pensions to the CPI.  This would cut expenses for the government by millions of pounds.  Now Steve Webb wants the same for the private sector pensions.  In 1995 legislation required occupational pension schemes to increase pension payments through connection with the RPI to a maximum of 5 per cent, and then over time it was reduced to 2.5 per cent.

“The government believes CPI provides a more appropriate measure of pension recipient’s inflation experiences and is also consistent with the measure of inflation used by the Bank of England,” Webb 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.”

While people will see their pensions grow slower, the relief to companies in their expenses for pension benefits will be welcomed. 

“This looks like a sensible change which would align public and private sector pensions and generally reduce the burden on pension schemes,” said pensions partner at KPMG, Mike Smedley.

“But we urge the government to make the legislation apply equally to all schemes and avoid a small print lottery for schemes and their members depending on technicalities and details of the scheme’s legal documents.”

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