Government cuts private pension costs
THE government yesterday outlined plans that will shave billions of pounds off the private sector’s pension bill, by reducing the amount that pension payments must rise in line with inflation.
In future, payments for those on final salary schemes will rise in line with inflation as measured by the consumer price index (CPI), as opposed to the retail price index (RPI), which is historically much higher.
Currently, private sector pension schemes must uprate their payments by either 2.5 per cent or the cost of living, depending on whichever is highest.
Under existing arrangements, the cost of living is measured by the RPI, which includes housing costs like mortgage interest payments. That means it has been considerably higher as house prices have boomed.
The coalition is making the move to reduce the cost of private sector pensions to the government, which must step in and help fund the schemes when they fall into difficulties.
Treasury sources insist the CPI measure of inflation is better for working out the cost of living for pensioners, most of whom have no housing costs. The average gap between the CPI and RPI has been around 0.5 per cent a year over the last twenty years.
Pensions minister Steve Webb said: “The government believes the CPI provides a more appropriate measure of pension recipients’ inflation experiences.”
“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.”
Accountants KMPG said the move would, at a stroke, wipe £50bn from the pensions deficits of FTSE 350 companies.
Employers’ group the CBI welcomed the change. “Statutory indexation is the biggest single regulatory cost borne by final salary schemes,” it said.
But the Trades Union Congress hit out at the plans, claiming today’s pension payments would be 14 per cent lower if they had been increased in line with the CPI instead of the RPI.
The move does not effect those on defined-contribution schemes, which have become more prevalent in recent years. Their pension will depend on the inflation arrangements of the annuity they purchase when they retire.