Pension holders could still be ‘hit’ – despite retention of RPI calculation
Millions of pension holders are still likely to suffer reductions to their retirement incomes, despite the current method of calculating the Retail Prices Index (RPI) being maintained.
The Office for National Statistics has this morning unexpectedly announced its recommendation to retain the formula to calculate the RPI, rather than bringing it more in line with the typically lower Consumer Prices Index (CPI). These recommendations were accepted by the UK Statistics Authority.
However, a new RPI-based index, that “meets international standards” and which will be known as the RPIJ, will be published from March.
Whilst we welcome the news that the existing method to calculate the Retail Prices Index will be left unchanged – as those who are fortunate enough to be members of a strong final salary scheme will benefit from the higher index – we suspect that the decision not to effectively reduce RPI is now likely to accelerate the number of pension schemes which will switch indexation from RPI to CPI.
Should this occur, it would mean that, despite the retention of the RPI calculation, many millions of pensioners will still suffer reductions to their retirement incomes.
The government set a dangerous precedent when it allowed companies to switch from RPI to CPI, as firms have been using such a
changeover of indices as a way of reducing deficits and reducing contributions – which, of course, means members’ pension pots bear the brunt.
BT, for example, managed to reduce its deficit by £2bn as result of switching from RPI to CPI. This might have been good for BT, but it was only achieved by paying pension members reduced benefits.