From the TUC

What your public sector pension would now be worth if it had been linked to CPI

06 Jul 2010, by in Pensions & Investment, Public services

An average eighty year old public sector pensioner would be more than £650 a year worse off if the budget change to the indexing of pensions had been in force since their retirement.

We have already noted that changing the price inflation index to CPI in benefits, public sector pensions and the state pension.

The new Social Trends however has figures for CPI and RPI going back twenty years. (Table 6.19 in Social Trends 2010) This allows us to work out that an eighty year old pensioner on the median public sector pension of £5,500 who has been retired for twenty years would now have a pension of £4,845 a year – 12 per cent or £655 less – if CPI uprating had been in force since their retirement.

A public service pensioner who has been retired for ten years would now have a pension 8.4 per cent lower.

CPI inflation tends to be lower than RPI in most years for two reasons.

  • It excludes housing costs and council tax.
  • It is calculated in a different technical way, which means that even if other things are equal it will be 0.5% less than RPI.

Yet at least some public sector staff are still being told that their pensions will be linked to RPI:

The guide to the Teachers’ pension scheme says

Pensions Increase

Your pension will be increased to take into account increases in the cost of living. This is called ‘index-linking’ because the increases are related to rises in the Retail Price Index.

As the TUC’s Brendan Barber has said today:

“Significant changes were negotiated in public sector pensions just a few years ago and the Budget has cut benefits further. Yet Treasury figures endorsed by the National Audit Office and the Office of Budget Responsibility show that even before these budget changes, public sector pensions is the only cost associated with our aging society that holds steady over the next four decades.

“The real pensions crisis in the UK is the retreat by employers from providing pensions in the private sector – and the big unexpected looming bill for tax-payers is the cost of means-tested benefits for the millions let down by their employers. It is not surprising that employer organisation want to change the subject by attacking public sector pensions.”

Ministers say that CPI inflation is a more appropriate measure for pension indexing because pensioners are less likely to have a mortgage. But this fails to take into account council tax, often a heavy burden for pensioners, the effects of the different method of calculation and other research that shows in recent years inflation has been higher for pensioners than for average households.

Research for the Institute of Fiscal Studies has shown:

The basic state pension increased by less than pensioner inflation in 2006, 2007 and 2008, and even the guarantee element of the pension credit, uprated in line with average earnings, fell relative to pensioner inflation in both 2007 and 2008.

You can use the table below in two ways.

First it simply shows how CPI and RPI have varied over the years. The bold figures are for years where CPI is greater than RPI.

Secondly you can work out how much less your pension would be today by looking at the row for the year in which you retired. The % loss column will show you how much lower your pension would be today. (As in the last two untypical years CPI has been higher than RPI, very recent retirees would be better off – but the Treasury is predicting that RPI will be consistently bigger than CPI over the next five years.)

The two final columns do this calculation for the TUC’s estimate of the median public sector pension in payment of £5,500.

Years in which CPI was higher than RPI are in bold.

Number of years retired year of retirement September RPI September CPI % loss CPI linked pension compared to £5,500 median pension cash lost on median public sector pension of £5,500
21 1989 7.6 5.2 13.9% £4,737 £763
20 1990 10.9 8.1 11.9% £4,845 £655
19 1991 4.1 7.1 9.6% £4,970 £530
18 1992 3.6 3 12.2% £4,831 £669
17 1993 1.8 3 11.7% £4,859 £641
16 1994 2.2 1.5 12.7% £4,803 £697
15 1995 3.9 3 12.1% £4,836 £664
14 1996 2.1 2.3 11.3% £4,878 £622
13 1997 3.6 1.8 11.5% £4,868 £632
12 1998 3.2 1.4 9.9% £4,955 £545
11 1999 1.1 1.2 8.3% £5,042 £458
10 2000 3.3 1 8.4% £5,037 £463
9 2001 1.7 1.3 6.3% £5,152 £348
8 2002 1.7 1 6.0% £5,173 £327
7 2003 2.8 1.4 5.3% £5,208 £292
6 2004 3.1 1.1 4.0% £5,280 £220
5 2005 2.7 2.5 2.1% £5,385 £115
4 2006 3.6 2.4 1.9% £5,395 £105
3 2007 3.9 1.8 0.8% £5,458 £42
2 2008 5 5.2 -1.3% £5,571 -£71
2009 0 1.1

The table was prepared by first calculating what a pension today of £5,500 would be worth each year in the past by reducing it by the value of RPI in each year back to 1989 when figures for CPI are first available (. Each year’s figure was then uprated in line with the previous year’s CPI to produce the figure in the penultimate column.)

4 Responses to What your public sector pension would now be worth if it had been linked to CPI

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