August 12, 2010
Government plans to directly link final salary pensions to the Consumer Prices Index (CPI) could axe almost 25% off pensioner’s weekly allowances and “prove a nightmare for millions”, experts have warned.
Under the coalition’s proposals, private occupational pensions would no longer have to keep pace with the Retail Prices Index (RPI), which has been used in Britain since 1974. Instead, firms would be allowed to use the CPI, which is usually lower.
The RPI, which includes housing costs, is the traditional measure of inflation and stands at 5%. The CPI tends to run at a lower rate and is currently 3.2%.
The move is designed to wipe £100 billion of the estimated £239bn black hole in final salary pension schemes.
However, experts said many Britons have been promised the higher RPI-linked annual increases and retrospective changes could breach their human rights.
"It is going to be a big headache for human resources teams and every individual in the pension scheme; they have to look at the rules and work out the pensions wording," KPMG’s Gordon Sharp warned both workers and their employers.
Members of an online forum for pensions experts, Mallowstreet, have written to the government, claiming the change has been imposed on the industry and that a full consultation period is required before such alterations can be enforced.
But the Department for Work and Pension (DWP) has rejected requests, claiming that private pensions need to fall inline with public pensions, which will also be linked to the CPI.
"As the change affects the requirement for statutory minimum increases, schemes may continue to make more generous provision," it added. "No consultation was therefore considered to be necessary.”
With changes due to be enforced by next year, those worried about how the coalition’s plans could affect their pension should seek financial advice as soon as possible.
