Pension change from Retail Prices Index to another index
Discussion
Mrs Toon has been working for the same company for over 20 years and is lucky enough to have one of the old final salary pension schemes. I believe they are trying to take these away and replace them.
They went to court to seek a decision as to whether it would be possible to change from the Retail Prices Index (RPI) to another index for the purposes of calculating pension increases paid in the future. Although the hearing outcome was that the Court confirmed it’s currently not possible to change from RPI to another index, she (and I) don't really understand what this means. I presume that they are trying to take away the more lucrative scheme and replace it with one that will make her worse off come retirement.
They are naturally disappointed with the decision but are considering the possibility of an appeal.
Are there any pension/financial experts out there who can provide a bit more light on what this all means?
They went to court to seek a decision as to whether it would be possible to change from the Retail Prices Index (RPI) to another index for the purposes of calculating pension increases paid in the future. Although the hearing outcome was that the Court confirmed it’s currently not possible to change from RPI to another index, she (and I) don't really understand what this means. I presume that they are trying to take away the more lucrative scheme and replace it with one that will make her worse off come retirement.
They are naturally disappointed with the decision but are considering the possibility of an appeal.
Are there any pension/financial experts out there who can provide a bit more light on what this all means?
sidicks said:
At a very simplistic level, many DB pension scheme have future benefits that are linked to inflation, in the past it was typically the retail price index (RPI).
E.g. you might expect to receive a pension of £x per year based on your service and your salary at retirement, where x increases by the change in the retail price index each year. The intention is for your income to retain its real purchasing power over time.
Obviously this type of pension is much more expensive than one that stays at the same level throughout the rest of your life.
If the inflation linking was changed to the consumer price index (CPI), you’d still have some inflation protection, but at a lower level, which would reduce the liability pension scheme.
Historically the ‘wedge’ I.e. gap between RPI and CPI is 70-100bps (I.e. 0.7% - 1.0%), due to the different inputs that go into the calculation and the different calculation methodology).
To put that in context, if your pension was £10k at retirement, after 10 years with 3% inflation you’d be receiving £13,439 compared to £12,190 if the inflation index was just 2% p.a over the same period.
Does that help?
Yes, it's BT Dingg. E.g. you might expect to receive a pension of £x per year based on your service and your salary at retirement, where x increases by the change in the retail price index each year. The intention is for your income to retain its real purchasing power over time.
Obviously this type of pension is much more expensive than one that stays at the same level throughout the rest of your life.
If the inflation linking was changed to the consumer price index (CPI), you’d still have some inflation protection, but at a lower level, which would reduce the liability pension scheme.
Historically the ‘wedge’ I.e. gap between RPI and CPI is 70-100bps (I.e. 0.7% - 1.0%), due to the different inputs that go into the calculation and the different calculation methodology).
To put that in context, if your pension was £10k at retirement, after 10 years with 3% inflation you’d be receiving £13,439 compared to £12,190 if the inflation index was just 2% p.a over the same period.
Does that help?
Thanks for this. It does help and I can see why they would want to change this.
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