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Private final salary pensions to get lower inflation rise

The government is to switch the index linking of private sector final salary pension schemes to the consumer price index (CPI) in a move that helps employers but hits pensioners and workers.

Private final salary pensions to get lower inflation rise

The government is to switch the index linking of private sector final salary pension schemes to the consumer price index (CPI) in a move that helps employers but hits pensioners and workers.

The move to link occupational pensions to the CPI away from the retail price index (RPI) follows a similar measure to public sector pensions in the emergency Budget last month.

It will be highly controversial as CPI, which excludes house prices and mortgage payments, has been consistently lower than RPI. Experts estimate the change will cut people’s pensions incomes by around 10% and 25% in retirement. This would reduce employers’ pension liabilities by £100 billion.

Payments made by the Pension Protection Fund and the government's Financial Assistance Scheme would also be linked to CPI.

The coalition government also risks the accusation that it is effectively changing the terms of individuals’ accrued benefits, something it said it would not do as it sought to curb reduce the financial burden of pensions on the economy.

Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), welcomed the decision to extend the reform across all pensions.

She said: ‘By applying the same index measure to private sector pensions, trustees and fund managers now have more flexibility. This gives final salary pensions some breathing space, and it will make it a little easier for firms to keep schemes open.’

Neil Carberry, head of employment and pensions at the Confederation of British Industry, the employers’ body, said statutory indexation was the biggest single regulatory cost borne by final salary schemes.

‘We hope that the government will also table overriding legislation, to ensure that schemes whose rules currently prevent them from taking advantage of this change can do so.’

Lib Dem pensions minister Steve Webb announced the move yesterday stating: ‘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 added: ‘We believe it is right to use the same index in determining increases for all occupational pensions.’

Consumer and pensioner groups are likely to challenge this view. Although many pensioners own their homes, they have experienced higher inflation as food, heating and care costs have soared above even RPI.

The rival CPI measure has only exceeded RPI three times in the last 20 years. Although on average CPI has only been 0.5% lower than RPI, this gap can make a huge difference to the size of pensions as more time goes by.

34 comments so far. Why not have your say?

richard dyer-smith

Jul 09, 2010 at 09:23

As a Pensioner myself I don't like this. This Conservative/Lib. Dem. coalition is a disaster which we will probably have to 'survive' for 5 years. Then, who knows....???

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Paul Round

Jul 09, 2010 at 09:36

I too live on my pensions and do not like it personally.However, we need, as a country, to live within our means and that includes pensioners, so this measure has my support.Unfortunately, there are already signs that vested interests will try to resist the necessary cuts: they are always "special cases" whereas nobody else is of course!

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Andrew Wright

Jul 09, 2010 at 09:52

While lower indexation (however it's achieved) is an undoubted bonus to Schemes themselves, I'm concerned with the precedent this sets - irrespective of your opinions on the generosity of DB scheme, members have entered into a contract and should reasonably be able to expect that said contract is honoured.

If it's suddenly OK to apply changes retrospectively what's to stop a law being passed that changes an historic accrual rate, say from 1/60ths to 1/80ths? (That's a genuine question by the way - if someone has an answer I'd like to know)

As for the point that this will encourage employers to keep DB schemes open, I have doubts. This may provide a stay of execution, but for as long as employers' legal requirements to provide pensions are so tiny, any DB scheme will still be low hanging fruit for a firm trying to save money - close to new members, cease accrual, open a DC section, whatever, forecasting DB liabilities will never be an exact science.

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Chartered Accountant

Jul 09, 2010 at 09:56

It is not all bad. Anyone holding UK company shares in a Money Purchase pension scheme or in ISA's is likely to benefit from the lower costs borne by the companies in which they are invested. In addition, the comment from Joanne Seggars, that this move will help companies to keep their final salary schemes open, bears noting.

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Anonymous 1 needed this 'off the record'

Jul 09, 2010 at 09:57

What a stupid comment by Mr Dyer-Smith. As a pensioner myself, I voted Tory for the first time in my life because I believed that unlike Labour, if elected it would take the necessary steps to restore the economy - and so far I have not been disappointed. We have all enjoyed 13 years (and in fact considerably more0 of living beyond our means under Labour; now payback time is here so just grin and bear it Mr D-S.

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James Watts

Jul 09, 2010 at 10:06

I entered into a private contract with my employer which (inter alia) provided that I would receive a pension that was indexed to the RPI!

This formed an important consideration in my decision making regarding my employment at the time.

If this Government now passes legislation, which makes it possible for that contract to be altered in a way which disadvantages me, to the benefit of my old employer, I will be dismayed!

(To the extent I will actively campaign against them!)

However, the precedent which will then have been set, which will allow any future administration to arbitrarily make retrospective changes to private contractual arrangements, which it thinks to be in the "overall good" of the nation is a step towards totalitarianism!!

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Ivor Nestegg

Jul 09, 2010 at 10:06

For the record, PPF increases are capped at 5% irrespective of the RPI or CPI figure and this applies only to service post 1997.

So a pensioner in a PPF sheme who retired in 2007 with (say) 30 years service pre 1997 and 10 years post 1997 can only get a a maximum of 10/40 x 5% - i.e. 1.25%. If RPI rises by 3%, then they get 1/4 of this figure - i.e. 0.75%.

An odd % point or two of difference between the CPI and RPI will make virtually no dofference in this scenario.

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Jul 09, 2010 at 10:20

This is short-termism, in the sense that those DB members whose pensions would have been worth something at retirement will now find that they are having to rely on the State. Stupidity itself, and indeed very much opens the door to any similar "brilliant" ideas being mooted in the future.

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Jul 09, 2010 at 10:51

Ivor is correct about the increase cap. Private schemes will need a change in trust deed and rules to bring this in though, or is the government only proposing to apply this to contracted out / rebate schemes? One other point, maybe it's not unreasonable to exclude the costs of mortgages on the grounds that most retirees will have paid off their mortgages.

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tough enough

Jul 09, 2010 at 11:04

I have always lived within my means and played by all the rules.

I left school at 15 worked down a coal mine for 10 years and got an external degree in mining engineering ( pass rate 1 in 20 in those days).

I always had responsible jobs and before I retired I had one abscence in my last 15 years.

I retired at 57 and I support my self in the main by my investments ( 80% of income ) pension (20% of income after 42 years full employment ).

I have two country cottages here and one in France.I owe nothing.

Being 58 I will now get my old age pension at the age of 66 I deeply resent this theft of my money.

What to do about it ??

Well remember Norman Tebbit "Get on yer bike"?

Well I think Norman Tebbit was right ( but before his time ) and I think that I might "get on my bike" and peddle over to Cyprus and pay bugger all in tax..or retire to france.

we can all make decissions

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Jul 09, 2010 at 11:37

This could be the preparation for interest rates to rise as mortgage repayments are included in RPI but not CPI

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Anonymous 2 needed this 'off the record'

Jul 09, 2010 at 11:42

In essence the Government's proposal seeks to enable employers to renege on their promises to members of their pension schemes so that they can escape the consequences of their failure to properly fund those schemes over many years.

The final salary pensions timebomb was obvious three decades and more ago. It was mooted at that time that the law should be changed on a gradual basis to move to a position whereby pension schemes were required to be fully funded to meet their liabilities at any point in time, even in the absence of the sponsoring employer. However, successive governments ducked the issue. They thus effectively colluded with employers to exacerbate the timebomb that they are now seeking to defuse through diluting pensioners' entitlements. If there had been a more courageous and far-sighted approach by government all those years ago, we would not now be having this debate and there might be little need for a Pension Protection Fund.

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Jul 09, 2010 at 12:08

How dare the Govt interfere with a contract agreed between me and my employer. In additition people have already made plans not unreasonably based on the T&Cs of their contracted pension. Why bother to plan at all if the rules can be changed retrospectively?

Does anyone know of a petition or action group which has been set up to challenge this?

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Anonymous 3 needed this 'off the record'

Jul 09, 2010 at 12:08

I did not notice anyone from the private sector complaining when the same change occured to the public sector schemes last month.

Perhaps some people will realise what happens to us will happen to you. As they say be carefull what you wish for.

Welcome to the club.

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Jul 09, 2010 at 12:14

Whilst I don't like to cut my own throat, as a prudent pensioner, I have worked to pay off my mortgage, and have cleared it.

I suspect most retired people have paid off their mortgages.

So, if you are an altruist, what's your beef with CPI?

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Anonymous 4 needed this 'off the record'

Jul 09, 2010 at 12:37

" We have all enjoyed 13 years of living beyond our means under Labour."

Anonymous 1, You speak for yourself, I've always been sensible and lived within my means. Now I see myself and others like me being punished for doing so.

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Anonymous 4 needed this 'off the record'

Jul 09, 2010 at 12:40

Harri, just curious, do your sentiments extend to the public sector?

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Richard Gough

Jul 09, 2010 at 12:45

There has been much comment about retrospection in this annoucenment. It is no way retrospective - if it was then previous increases would have to be repaid. This applies to future increases.

Successive governments over very many years (30+) have legislated to change the way final salary schemes have to be run - the vast majority of these were for the benefit to members without any consideration for the additional cost to the employer.

Whichever way you look at it a final salary scheme is always a very attractive benefit and if you compare the cost of providing a similar pension through a money purchase arrangement to the amount an individual has actually contributed then it is always a fantastic deal.

The move to CPI seems to make sense given it is an inflation figure which excludes mortgages and most pensioners would have repaid their mortgage and thus arguably their inflation rate is more akin to CPI than RPI.

The whole point of increases in payment is to maintain purchasing power and not to make an individual more wealthy.

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Anonymous 4 needed this 'off the record'

Jul 09, 2010 at 12:46

Anon 2 said: "It was mooted at that time that the law should be changed on a gradual basis to move to a position whereby pension schemes were required to be fully funded to meet their liabilities at any point in time"

Don't forget that in the case of public sector pensions, Govts were only too happy to leave them unfunded and could thus raid the kitty during times of surplus.

I'm sure most private sector folk would be enraged if their company dipped into the pension fund for spending money. Oh yeah, there was a bloke who did that wasn't there.....

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Jul 09, 2010 at 13:34

Harri is right. Retrospective legislation is downright dangerous and already exists in the form of 'Windfall Taxes' applied to so called 'super' profit making enterprises. No need for an action group though. The 'silver vote' dwarfs other electoral groups. I repeat my suggestion of some 9 years ago, that we form the 'Integrity Party' dedicated to honest politics. A first act when elected to power, will be halving the number of parliamentary seats in the House of Commons and doing likewise with MPs pensions and Ministerial pensions too! Next, abolish the House of Lords and replace it with a Senate comprising 100 elected members only. That's for starters! The Scottish Govt, the Welsh Assembly and the Northern Ireland outfits to receive the same kind of attention. Lots of room for declutering the gravy train - not really retribution is it?

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Jul 09, 2010 at 13:52

How does this compare with the corporation tax changes of the last government which were universally condemmed? As I understand the position the corporation tax changes redirected future payments to benefit the economney. This is a blatent manipulation to reduce pension payments already earned to benefit pension providers.

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Joe Bloggs

Jul 09, 2010 at 14:19

I am so angry, all politicians are a waste of time and space.

Why dont they close their own lucrative pensions and perks, no, just hit the masses, and we lie down and take it.

Private sector is private, they are too scarred to mess about with the public sector, and where they have golden handshakes, and brilliant pensions.

This country is a mess, might as well leave and go where there is less burden.

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Ann E

Jul 09, 2010 at 14:33

This has been done on the grounds that pensioners don't have mortgages. Has the Government already forgotten the "with profits endowments" scandal which resulted in those of us who thought we would pay off our interest only mortgages with a capital pot, losing most of our money. Then the rest was taken away in the "Offshore Icelandic Banks" scandal.

Now we are retired, there is no opportunity to make further provision. Our occupational pensions benefits were paid for on the basis of RPI indexing. Retrospectively altering the terms of pensions in payment, has to be legally challengeable.

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colin knights

Jul 09, 2010 at 15:38

Most private fina[l salary schemes have already closed following government interference.The last master stroke being GB's tax on pension fund interest.

The latest intrusion seems to be a sad reflection on the promise of less central government control.

Whilst final salary schemes were a remote subject largely out of sight they ploughed on incurring substatial deficits then substantial surplusses.It was when governments lost sight of this and decided to cream off the surplusses that the subsequent deficits became unsustainable and most schemes closed.

There is no reson why final salary schemes would not be feasible if government would get out of the way give us our tax break back and accept tthese are long term contracts erd there is no need for them to be fully funded on a permanent basis

I have considerable sympathy for public sector workers.Clearly there has to be a balence between the private sector who produce the wealth to pay for the public sector services but it must be clear the massive increase in pulic sector jobs since 1997 has become unsustainable and unfair given the experience of many in the private sector

The only way forward now is defined contribution schemes for all but it would be fairer if the govrnment offerred some sort of guaranteed annuity if

at the end of a long period of saving for a pension the annuity available at the time of retirement fell below a reasonable level.

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AL from Herts

Jul 09, 2010 at 16:09

I too am furious. Echo comments regarding retrospectively changing accrued benefits. At the time of taking my annuity, I made a choice to take an RPI pension as opposed to a much higher paying flat pension. Over the next 20 or so years of my life, I will effectively hand my old employer a significant chunk of MY contributions !! How can this be acceptable ??

So how can this be legally challenged?

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Chris Hayes

Jul 09, 2010 at 17:09

"Pensioner = no mortgage = CPI" or "Pensioners' real rate of inflation is actually higher than either CPI or RPI".

Which is it? It strikes me that the former is cheaply bandied about; the latter based on some actual analysis..

*IF* the latter is the case then where is "PPI" and shouldn't we be using that instead.

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Jul 09, 2010 at 19:01

By the time I retired my debts including my mortgage had been fully paid off, so it is true that the CPI reflects my inflation rate more accurately than the RPI.

But surely that's not the point. I thought I had a legally binding contract to have my pension increased in line with the Retail Price Index - after all, it says so in black and white.

What is really astonishing is that it is a Conservative led Government that is introducing this change; in the past it was always Labour that reneged on what had appeared to be legally binding agreements. Now there's no-one we can trust.

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derek millington

Jul 09, 2010 at 20:58

Unfair meddling in a private agreement between an employee and employer's pension scheme .

Lobby your Tory / Liberal Dem. MP before doing what the French would do take to the streets!

It is not done deal yet.-----

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Andy Mann

Jul 10, 2010 at 14:33

Such a change would amount to a decree that arbitrarily alters private occupational pension schemes so as to give employers a £100 billion windfall. Governments do not fund private pensions and private occupational pension schemes are contracts between private companies and their employees, so what right does the government have to impose arbitrary changes to them? What is to stop employers banking the windfall saved by switching from RPI to CPI-linked and then closing their occupational schemes?

This proposal blatantly discriminates in favour of employers and against employees. To suggest that the terms of private occupational pension schemes can just be overridden at will is to propose raising the legal force of politicans' decrees above those of existing written contractual terms and conditions. Such a proposal is inherently unsound and must be met with resolute opposition in parliament and vigorous challenge in the courts.

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Jul 10, 2010 at 22:03

It would be simply outrageous if the government were to change the rules on pension indexation from RPI to CPI for pensions now in payment or for accrued pension rights. (I always thought that such retrospective changes were contrary to the law). I actually paid the maximum possible AVC into my company pension believing it to be a good deal partly because of the written promise of an eventual RPI link. Had it been CPI or some other measure I may well have chosen to put that money elsewhere. Now being over 65 it is too late to do anything about this threatened change.

I do think that public sector pensions are a considerable burden on the taxpayer and also that the public sector has grown too large. However for the government to go back on promises made to its own employees is also deplorable so there is no real difference between public and private employees and pensioners in this RPI/CPI proposal, if applied retrospectively.

What should happen is that any such change would ONLY apply to future pension accrual NOT to accrued rights.

I would urge everyone likely to be significantly affected by this proposed change (that means just about everyone, except the politicians with their special pension scheme) to protest in the strongest possible terms. At least write to their MPs to protest. If they get away with this - what next?

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jim grassick

Jul 11, 2010 at 12:09

The real problem has been the poor returns delivered by the stock market. Short selling drives out investors, resulting in lower demand and lower prices. The Government has to sort this out, if pension funds are to deliver ANY returns in the future

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James O'Donnell

Jul 11, 2010 at 16:17

I think that the legality of interfering with private arrangements should be challenged. It should be tested in the courts.


This is the most totalitarian measure that I have ever heard of in a democracy.

It is plainly the result of lobbying by vested interests. I thought we had got rid of corruption. Obviously not. Did you vote Tory?? You should hang your head in shame!!

Come on Lib. Dems.! Ditch this pack of idiots now!

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Andy Mann

Jul 11, 2010 at 19:54

I am not sure if I understand what Steve Webb has proposed....

If the wording in a particular private occupational pension scheme about 'deferred pension revaluation' or 'pension-in-payment increases' simply refers to the Pension Scheme Acts 1993 and 1995 (actually 1997) or contains phrases like "Government announced inflation" then it is quite possible that at some future time, a government could choose to use CPI rather than RPI indexing as the basis for 'government announced inflation'. No change would be required to the existing contractual terms and conditions of that particular Occupational Pension Scheme for the government to be able to do this.

If hovever, the relevant wording explictly refers to RPI with regard to deferred pension revaluation or pension-in-payment increases, then, in my opinion, such a change would require new legislation to be passed in the House of Commons and the Lords. If such an bill were to be enacted, it would amount to a discriminatory attempt to absolve employers of an estimated £100 billion pounds of liabilities to their former employees and would constitute an unfair alteration of existing legally binding terms and conditions. Since this would be a retrospective change that would blatantly disadvantage pensioners I doubt if it would get through the Lords or survive legal challenge in the courts. Any attempt to get such legislation through parliament would utterly demolish any claim to impartiality and fairness that the Con/LibDem government might make and it might even be countermanded by the European Court Of Justice.

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Jul 14, 2010 at 14:22

I share James O's view but I rather suspect this is as much a Lib Dem' 'fairness' policy as a Tory plot. Be careful what you wish for James!

As usual politicians conveniently ignore history when it suits their purpose. For many decades large employers have used so called attractive early retirement packages to cull their labour forces and the process was also instrumental in opening up opportunities for younger employees. To that extent the policy might have been regarded as win win.

However as several contributors have pointed out, in arriving at the point of taking the'package' all employees consider the terms on offer and have to form a view as whether they can manage on what is being offered. For the indexation to be changed by act of parliament represents a serious breach of trust and must be regarded as such. Pensioners have already been sufferring misreable returns on savings whereas those with mortgages who have retained their jobs (the vast majority) have received windfall income arising from reduced mortgage repayments. We keep being told 'we are all in this together' and we must share the pain. When are we going to stop subsidising the private housing sector by propping up unrealistic property prices which are completely out of step with the earnings?

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