By Sarah Coles, Dec 2, 2011 - http://money.aol.co.uk/2011/12/02/three-letters-cost-pensioners-47k/
Money is a peculiar area. Something vast and life-changing can be described in a couple of meaningless acronyms that unsurprisingly pass us by. But further down the line, we suddenly realise that three little letters have changed our world dramatically for the worse.
So it was when scores of companies quietly changed the inflation link of their pensions from RPI to CPI. What passed in a fug of ‘so what?’ was a move that could cost pensioners thousands.
Why the switch matters
They are both measures of inflation: the retail prices index and the consumer price index. The former was always used as the official measure of inflation, and was the most common indexation for pension schemes. However, gradually CPI has started to dominate and in December 2003 it became the figure used for the Bank of England inflation target. This matters because RPI includes housing costs, and as a result tends to be higher.
In fact, figures this week reveal that the gap could be even bigger than we previously thought. The Office for Budget Responsibility calculated the typical difference as 1.4 points – compared to previous assumptions of 0.87 points.
By switching from a link to RPI to a measure based on CPI, companies can increase their payouts by less each year, and cut thousands of pounds from the average pension. Using the new figures, someone retiring right now on an annual pension of £10,000 could lose out on an incredible £47,000 over the life of their pension as a result.
Can they do this?
The schemes are acting entirely lawfully. Around one in four pension schemes have permission to change their form of indexation written into them. Many have already done so, including British Airways.
Today’s ruling that the government acted lawfully when switching public sector pension indexation to CPI will help accelerate the private sector moves. Pension scheme are like any kind of reward: no company will deliberately offer more than the competition, so if the competition switches to CPI, they have no reason not to.
What can you do?
If your company decides to make the move there is little you can do other than be aware of it and make alternative arrangements where you can for more income as you go through retirement.
Tom McPhail, the head of pensions research at Hargreaves Lansdown, said: “For the members it represents a significant diminution of their pension rights. They will need to adjust their investment, income and expenditure plans in order to avoid a steady decline in their standard of living in retirement.”