Pensioners are still reeling from the government’s announcement that pensions can be indexed using the Consumer Prices Index rather than the Retail Prices Index.
It was announced recently that the government changed the rules about how pensions should keep up with the reality of inflation.
Up until now, the commonly used index was the RPI, which tracked a number of prices including accommodation costs. It typically gave a figure of 5%.
However, the CPI excludes the costs of mortgages, and stands at around 3.2%.
It’s true that such actuarial changes may not be the most exciting news to read about, but for millions of members of UK private pension schemes, the change presents a significant drop in their income.
Investment company Hargreaves Lansdown have estimated that some on a pension of £10,000 per year would find that indexed up to £25,270 in twenty years’ time if their pension is based on RPI. However, if their pension is increased in line with CPI, they would only receive £18,875. The difference is clearly significant, especially if by that time the retiree is very elderly and in need of expensive care and sheltered accommodation.
Some pensioners may escape this rule because their pensions are expressed to be specifically indexed in line with RPI. Others, however, merely state that pension trustees must use the index that is prescribed from time to time by the government – which is now CPI.
Aside from the impact that this move may have on pensioners’ incomes, part of the controversy surrounding this change is the fact that the coalition did not consult on it. Instead they presented it as a fait accompli. Pensioners’ groups have been furious, and the Department of Work and Pension’s response has done little to appease them.
When asked why the DWP did not bother to consult on the issue, a spokesman said that it was always open to firms to pay more and choose RPI instead. Are any firms likely to do this in the present climate? That seems as unlikely as a new employee in the private sector getting a final salary pension.
