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?
toon10 said:
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?
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).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?
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?
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.
When UK government issues "index linked" gilts (bonds) or even National savings certificates they are linked to RPI. For practical purposes RPI is real UK inflation and it has existed for 70 years.
When the Labour government was elected in 1997 they were looking for ways to "cheat" on their inflation figures and introduced CPI. It runs alongside RPI but is measured differently, conveniently massaging down the figures. Naturally such cheating has equal appeal to subsequent Conservative governments..
Put at the simplest RPI is real inflation and CPI is artificially suppressed inflation. The government is therefore keen to palm-off CPI on everyone else.
When the Labour government was elected in 1997 they were looking for ways to "cheat" on their inflation figures and introduced CPI. It runs alongside RPI but is measured differently, conveniently massaging down the figures. Naturally such cheating has equal appeal to subsequent Conservative governments..
Put at the simplest RPI is real inflation and CPI is artificially suppressed inflation. The government is therefore keen to palm-off CPI on everyone else.
Regarding pension, the government thinks it will get an "easy win" sooner or later by simultaneously,
Finally, both RPI and CPI are calculated by looking at the price of things in a "basket". The RPI is calculated as an arithmetic mean – and CPI is calculated as a geometric mean. The advantage to the government of using a geometric mean is that the result is always below or equal to the arithmetic mean, never above it. This effect tends to produce a difference of about 1% between the two indices.
1% may not sound much but over time the compounding effect of a 1% drag every year grows very big. For instance, during 22 years of retirement the overall drag would reduce your pension income by about 25% from what it should otherwise have been. Ouch!
- Changing the law to over-ride private pension scheme wording and allow the companies to cut back to CPI, and
- Change the law to over-ride public sector pension scheme wording and cut them back to CPI as well.
Finally, both RPI and CPI are calculated by looking at the price of things in a "basket". The RPI is calculated as an arithmetic mean – and CPI is calculated as a geometric mean. The advantage to the government of using a geometric mean is that the result is always below or equal to the arithmetic mean, never above it. This effect tends to produce a difference of about 1% between the two indices.
1% may not sound much but over time the compounding effect of a 1% drag every year grows very big. For instance, during 22 years of retirement the overall drag would reduce your pension income by about 25% from what it should otherwise have been. Ouch!
rockin said:
Regarding pension, the government thinks it will get an "easy win" sooner or later by simultaneously,
Finally, both RPI and CPI are calculated by looking at the price of things in a "basket". The RPI is calculated as an arithmetic mean – and CPI is calculated as a geometric mean. The advantage to the government of using a geometric mean is that the result is always below or equal to the arithmetic mean, never above it. This effect tends to produce a difference of about 1% between the two indices.
The methodology is not the main contributor to the wedge - it is the basket constituents that make most of the difference.- Changing the law to over-ride private pension scheme wording and allow the companies to cut back to CPI, and
- Change the law to over-ride public sector pension scheme wording and cut them back to CPI as well.
Finally, both RPI and CPI are calculated by looking at the price of things in a "basket". The RPI is calculated as an arithmetic mean – and CPI is calculated as a geometric mean. The advantage to the government of using a geometric mean is that the result is always below or equal to the arithmetic mean, never above it. This effect tends to produce a difference of about 1% between the two indices.
rockin said:
1% may not sound much but over time the compounding effect of a 1% drag every year grows very big. For instance, during 22 years of retirement the overall drag would reduce your pension income by about 25% from what it should otherwise have been. Ouch!
Strictly speaking your income in the final year is 23% lower, but your total income over the period is ‘only’ 12% lower.RPI was 4.1% in Dec 17 and includes mortgage interest and housing costs including council tax (when these items fall it can briefly dip below CPI)
CPI in Dec 17 was 2.7% (they normally quote a 12 month average rate 3.0%)
So over the last few months CPI has been falling (to back below 3%) whilst RPI including housing costs has actually been rising!
If interest rates rise gradually then RPI will increase which probably explains why the company is acting after a long period on falling/flat interest rates ended.
CPI in Dec 17 was 2.7% (they normally quote a 12 month average rate 3.0%)
So over the last few months CPI has been falling (to back below 3%) whilst RPI including housing costs has actually been rising!
If interest rates rise gradually then RPI will increase which probably explains why the company is acting after a long period on falling/flat interest rates ended.
rfisher said:
Anyone know if the T&C of a pension can be changed by your employer after you have retired and activated the pension?
Presumably they are locked in to that contract until you die?
Or can they wriggle out of it at any time?
I believe so as the companies most affected usually have far more retired (current pensioners) than existing employees in those schemes. It also depends on scheme wording etc etcPresumably they are locked in to that contract until you die?
Or can they wriggle out of it at any time?
If pension scheme brings company down or stops it being saved if other things go badly then pension scheme could go into PPF with 10% cuts or more. And the RPI to CPI changes can have a £bn pound impact on big pension funds.
Generally a company cannot reduce the benefits for people already in receipt of them: eg pensions in payment take top priority in the pecking order if the company decides to wind up the scheme. An exception is if the scheme gets transferred into the Pension Protection Fund and usually benefits in payment get cut back by 10%
Rockin, you say you're receiving only 75% of what was promised. How come? Has the reduction happened some time after the benefits commenced and if so for what reason?
R.
Rockin, you say you're receiving only 75% of what was promised. How come? Has the reduction happened some time after the benefits commenced and if so for what reason?
R.
The Leaper said:
Generally a company cannot reduce the benefits for people already in receipt of them: eg pensions in payment take top priority in the pecking order if the company decides to wind up the scheme. An exception is if the scheme gets transferred into the Pension Protection Fund and usually benefits in payment get cut back by 10%
Rockin, you say you're receiving only 75% of what was promised. How come? Has the reduction happened some time after the benefits commenced and if so for what reason?
R.
He wasn’t talking about himself, he was referring to the (hypothetical) reduction after 22 years for a pension linked to CPI (assumed to be 2% p.a.) rather than RPI (assumed to be 3%).Rockin, you say you're receiving only 75% of what was promised. How come? Has the reduction happened some time after the benefits commenced and if so for what reason?
R.
I don’t think pensioner benefits get the 10% reduction that applies to other scheme members, but some other adjustments may be applied.
sidicks said:
I don’t think pensioner benefits get the 10% reduction that applies to other scheme members, but some other adjustments may be applied.
Had a look on some Carillion news and now see that the first point above is good for existing pensioners and the adjustments you mention are back into a capped CPI type rise.Sidicks said:
The methodology is not the main contributor to the wedge - it is the basket constituents that make most of the difference.
Just checked our submission to the BoE consultation of a few years ago. It seems I was wrong and the basket constituent and the formula had a broadly equal impact on the ‘wedge’.
Edited by sidicks on Friday 19th January 18:02
Regardless of the pros and cons, the argument for both sides is a well worn one. My public sector pension had its revaluation changed, a few years back. Life goes on.However, this ruling (below) of yesterday might have profound consequences. The High Court has ruled that RPI has not become inappropriate for the purposes of uprating pensions in the BT Pension Scheme:
https://www.scribd.com/document/369512837/BT-Pensi...
You might need a log-in to the link below, but searching <BT Pension scheme> will bring up a host of info.
https://www.ft.com/content/596f85d2-fd0c-11e7-a492...
https://www.scribd.com/document/369512837/BT-Pensi...
You might need a log-in to the link below, but searching <BT Pension scheme> will bring up a host of info.
https://www.ft.com/content/596f85d2-fd0c-11e7-a492...
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