CPI, RPI and public sector pensions
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.