From the TUC

CPI, RPI and public sector pensions

23 Jun 2010, by in Pensions & Investment, Public services

Public sector pensioners have been told that their accrued benefits are safe and therefore would not come under attack in any restructuring of public sector pensions. 

Yet hidden away in the small print of the budget is the news that in future public service pensions in payment will be linked to CPI rather than RPI. Richard and I blogged about what this means yesterday. (And thanks to commenter Paul for pointing this out – and apologies for first being sceptical).  

 Accrued benefits is pensions jargon for benefits that you have already built up. You can think of them as having the same status as previous pay packets. Your employer can change what’s in future pay packets, but they can hardly take money out of past ones. 

People paying into public sector pensions in the past were told that they were contributing towards a pension that would go up with RPI. 

Now even people who have already retired have been told that the rules have changed. 

At the moral level, this is undoubtedly an attack on accrued rights, but what about the law?

The government says this is legal because the legislation says that public service pensions are linked to uprating in the state second pension. As this is now linked to CPI, so therefore are public service pensions. 

This is what the Red Book says: 

1.106 The Government will use the CPI for the price indexation of benefits and tax credits from April 2011. The CPI provides a more appropriate measure of benefit and pension recipients’ inflation experiences than RPI, because it excludes the majority of housing costs faced by homeowners (low income households are subsidised separately through Housing Benefit, and the majority of pensioners own their home outright), and differences in calculation mean it may be considered a better representation of the way consumers change their consumption patterns in response to price changes. This will also ensure consistency with the measure of inflation used by the Bank of England. This change will also apply to public service pensions through the statutory link to the indexation of the Second State Pension.  

But the documentation for at least some schemes says different p24 of this civil service pension guide

Your pension is guaranteed to increase in line with inflation, as measured by the retail prices index (RPI). 

I seem to remember the last government got into terrible trouble for loose wording in a leaflet about the safety of DB pensions. 

Incidentally TUC pensions adviser Bryn Davies has pointed another technical difference between CPI and RPI. 

CPI is a geometric mean, while RPI is an arithmetic mean. For those I haven’t already lost, the full reference is here in para 9.4.1. 

But what we can all grasp is this: 

The CPI annual rate would typically have been about 0.5 percentage points higher if the elementary aggregates had been calculated using arithmetic means as in the RPI. 

In other words CPI would be 1/2 per cent lower than RPI, even if all other things were equal.

25 Responses to CPI, RPI and public sector pensions

  1. Tweets that mention CPI, RPI and public sector pensions | ToUChstone blog: A public policy blog from the TUC — Topsy.com
    Jun 23rd 2010, 8:38 pm

    […] This post was mentioned on Twitter by ToUChstone blog, TIGMOO. TIGMOO said: ToUChstone blog: CPI, RPI and public sector pensions http://bit.ly/cwMvpt […]

  2. Peter in York
    Jun 27th 2010, 12:03 pm

    The difference between the two rates is significant and the implications are not complicated – the Treasury is proposing to reduce the rate of increase of public sector pensions below what has been agreed. The difference was understood by people, including me, when we calculated whether we could afford to retire / semi-retire – at a time when we had the option of working longer. For mopst people who are retired that option is gone and they are trapped, without the power to resist through strike action. Changeing pension terms without prior consultaion is illegal and immoral. What have we done letting in this Government ?

  3. Peter in York
    Jun 27th 2010, 12:05 pm

    The difference between the two rates is significant and the implications are not complicated – the Treasury is proposing to reduce the rate of increase of public sector pensions below what has been agreed. The difference was understood by people, including me, when we calculated whether we could afford to retire / semi-retire – at a time when we had the option of working longer. For mopst people who are retired that option is gone and they are trapped, without the power to resist through strike action. Changeing pension terms without prior consultaion is in my opinion illegal and immoral

  4. The Observer should do better on public sector pensions | ToUChstone blog: A public policy blog from the TUC
    Jun 27th 2010, 2:59 pm

    […] a pre-election promise not to reduce the accrued benefits built up by public sector pensioners. By linking future increases in public sector pensions to CPI rather than RPI they are ensuring that pensions will go up on […]

  5. Mike Page
    Jun 28th 2010, 1:36 pm

    A further consideration is that many people, myself included, have been buying ‘past added years’ of pension with our own money, not funded by the state in any way. Substituting the CPI for RPI seems a fundamental revision of this contract. Relevant unions should be looking at the small print carefully and seeking a judicial review.

  6. Nigel Stanley

    Nigel Stanley
    Jun 28th 2010, 2:43 pm

    You can rest assured that unions are investigating the legal position.

  7. Simon Fields
    Jun 28th 2010, 7:07 pm

    I am concerned about this because I am retired and I planned my retirement based on RPI. My partner is younger than me and should I die first will receive half the pension would continue to be paid. Now this may force my partner on to benefits even thought I contributed to Past Added Years whichwas expensive (15% of salary) for may years. I therefore have lived at 6% below my salary – had I known I might have made different arrangements – an AVC. I also paid a lump sum. The TPS was clear that it was related to RPI and not CPI. There was no advice of it being related to the second pension. I checked this several times before I went ahead with the scheme and chose it over an AVC for this reason.

  8. Pauline
    Jun 28th 2010, 7:20 pm

    My partner left teaching 12 years ago and has contributed 10 years. I understood his pension would be determined using RPI for the gap in years. Will this now be CPI if so it will be of little value.

  9. Lawrence
    Jul 1st 2010, 10:02 pm

    Whether the change from RPI to CPI is immoral or not immoral is not the point – legal it is not, which is more to the point.

    Governments (our employer) has made a guaranteed to increase pensions in line with inflation, as measured by the retail prices index (RPI).

    This change will receive challenge, I find it hard to believe it will succeed in pressing for CPI

  10. Nigel Stanley

    Nigel Stanley
    Jul 1st 2010, 11:06 pm

    A few replies – and thanks for the comments:

    Simon – switching to CPI is undoubtedly bad news, but it’s very unlikely that an AVC would have been better for you. Annuity rates are very poor – especially if they are indexed. While I am no expert on the TPS – and don’t give individual advice – added years are generally considered to be a good thing. If you are a retired member of a teaching union they may know more.

    Pauline – I don’t see how this can be applied retrospectively for deferred pensions. the budget only talked about the indexing of pensions in payment. If this were true, we will certainly take it up.

    Lawrence – rest assured, unions are talking to lawyers about whether a legal challenge is possible. It is ferociously complicated, and may well end up in court to be decided.

  11. Peter
    Jul 3rd 2010, 6:03 pm

    THe Civil Service Pension scheme is actuarialy valued every 4 to 5years to determine the employers contribution rate to cover liabilities (pension entitlements accrued to date by all scheme members taking account of those that will retire inot the future). In doing so the actuary lists the benefits provided by the scheme and places a value on them to calculate the total liabilities (based on the membership of the scheme and the years service accrued to date). It is clear the actuary in 2007 included in the benefits of the scheme uprating by RPI (Appendix B). Pension Scheme members have therefore paid for uprating by RPI but this is now being confiscated from them.

  12. joe
    Jul 6th 2010, 5:53 pm

    Scandalous..

  13. Nigel Stanley

    Nigel Stanley
    Jul 7th 2010, 9:57 am

    People following this thread might be interested in my new post which looks at what today’s pensions would be worth if they had been linked to CPI rather than RPI.

  14. Rob Slack
    Jul 13th 2010, 4:37 pm

    Is it certain that RPI based inflation rates will always/mostly be higher than those based on CPI? That would need for housing related costs (the main difference) to go on rising faster than other items in the baskets. Is that realistic? (Perhaps, in time, if population projections are realistic). Anyone any thoughts please?

    Rob

  15. Nigel Stanley

    Nigel Stanley
    Jul 13th 2010, 5:33 pm

    Even if all other things are equal CPI will be around 0.5 % lower than RPI because it is calculated using a different formula ( see here).

    RPI tends to be higher than CPI because housing costs tend to go up somewhat more than other costs. Our continuing housing shortage suggests that is likely to continue.

    In some years CPI is higher than RPI, this is almost always when interest rates fall which brings down the cost of mortgages. This was so dramatic as the recession hit, that RPI actually went negative.

    While RPI can go up and down rather dramatically in such situations, CPI trends to be steadier. Don’t forget that the Bank of England is meant to target CPI and keep it at 2%.

    Of course the difference from one year to the next is unlikely to be that great, but over time they will mount up.

    This will also be a problem for deferred pensioners. If you leave a DB pension scheme before you retire the pension you eventually draw is normally linked to inflation. In future this is likely to be done by CPI by many schemes (though not retrospectively).

  16. Rob Slack
    Jul 13th 2010, 5:49 pm

    Thanks Nigel.

  17. Will the government introduce a bill to reduce private sector pensions in payment? | ToUChstone blog: A public policy blog from the TUC
    Jul 23rd 2010, 4:22 pm

    […] flows from the Government’s decision – announced in the budget and covered here and  here on Touchstone – to index public sector pensions and most benefits in future to the […]

  18. Stephen Cochrane
    Jul 30th 2010, 12:02 pm

    I thought that the Local Government Pension Scheme was outside the Second State Pension Scheme and therefore outside the scope of any change to CPI. Is this therefore incorrect?

  19. Nigel Stanley

    Nigel Stanley
    Jul 30th 2010, 1:17 pm

    Stephen

    Simplifying somewhat, most people will receive two tiers of pension.

    First is the basic state pension, which is now to be indexed to the higher of CPI prices, earnings or 2.5%. On top of this they will get a second tier of pension. This will be a combination of the state second pension and occupational pensions.

    As you say the LGPS – like all public sector pensions and most private sector DB pensions – opt out of the state second pension. This means that while you are a member of an opted out pension you are not building up any S2P entitlement.

    But what the government has said is that all bits of this second tier that they control – both S2P and publuc sector pensions – will now go up in line with CPI rather than RPI.

    So anyone with any S2P or public sector pension will be affected by the change.

    (This is a simplified account as I’m not dealing with those who individually opted out of SERPS/S2P to build up a private pension instead).

  20. Mick Cassidy
    Aug 7th 2010, 6:56 pm

    Can anyone explain, please, why public sector CETV calculations are being frozen now if the change to CPI rather than RPI is not to be implemented until April 2011? I asked for a CETV at the beginning of July but am told that all figures are on hold until the recalculation has been carried out.

  21. Kathrein
    Aug 9th 2010, 5:32 pm

    Very sneaky…….. but the government should bear in mind the public revolt over “The Poll Tax”.
    We will defiantly participate in public protests.
    Remember the government must listen to the voters.

  22. Michael Turner
    Aug 11th 2010, 8:14 pm

    Unfortunatley, since it will be based on an Act of Parliament, there can be no legal remedy.

  23. Ian Galston
    Aug 19th 2010, 3:48 pm

    In response to “Can anyone explain, please, why public sector CETV calculations are being frozen now if the change to CPI rather than RPI is not to be implemented until April 2011? I asked for a CETV at the beginning of July but am told that all figures are on hold until the recalculation has been carried out.”
    Although this is not being implemented until April 2011, the cash equivalent transfer value, will be reliant on the cost of provision of pension going forward, if that is then based on CPI increases instead of RPI increases (with CPI being around 0.5% per annum less) then the current factors used will not be applied, instead the Government Actuarial Dept. and HM Treasury are working on new factors which are expect for the end of August. In a nut shell expect a smaller CETV than before as the unfunded public sector schemes will not want to pay current CETV knowing that figures are changing from April 2011.

  24. brian seymour
    Aug 19th 2010, 8:06 pm

    does anyone know if there is to be a legal challenge to this?

  25. Nigel Stanley

    Nigel Stanley
    Aug 20th 2010, 5:49 pm

    It’s legally much more complicated than some commenters to this thread seem to think (unless they have counsel’s opinion that they have not shared!), advice is still being taken.

    The legal basis of public service pensions is very different from that of private sector DB schemes – and very careful consideration is needed before any action is taken.