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Lower pension increases
The ConDem Government announced in July 2010,
without any prior consultation, that future increases in public
service pensions would be based on the CPI measure of inflation
rather than the RPI measure which has previously been used for many
years.
This will impact increases to pensions when
they are in payment and increases in deferred pensions (and any
CARE pensions) before they come into payment. It will affect all
benefits earned in the past as well as all benefits earned in the
future.
CPI is generally lower than RPI inflation. The
government estimated the difference as meaning a reduction in the
average annual increase of 0.87 per cent. Subsequently the ONS has
made revisions in the calculation method as this will increase the
gap and the OBR has published a long term forecast of the
difference as being 1.4 per cent. All this suggests that 1 per cent
is a reasonable figure to use to estimate the effects. This
means, for example, that after 10 years of retirement a pension
would be 8.5 per cent lower with CPI indexation, and after 20
years 17 per cent lower.
For the annual increase in April 2011, the
first year when this will take effect, the difference is an
exceptional 1.5% (as RPI would have given 4.6% and CPI 3.1%) .
It has been calculated that in the long term
this change will reduced the value of total benefits paid out by
the schemes by 15%
The Government initially claimed that CPI is a
better measure of inflation for pensioners as it excludes housing
costs. They have subsequently admitted that they chose CPI as it
was lower and they wanted to cut benefits
The main reason CPI is lower is because it
measures inflation not on what you want to buy but on what you buy
taking account of price rises. So, if you are forced to switch your
spending to cheaper items whose prices are rising slower, the
inflation on the goods you actually buy is less.
The reason this change was possible was that
the legislation relating to pension left the Government discretion
to decide what measure of inflation to use, it did not specify RPI
– and scheme rules refer to the legislation, and not RPI.
Unite has joined other trade unions in seeking
a judicial review of the Government decision to use CPI and the
case is expected to be heard in October 2011
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