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8 December 2010
Last updated at 06:55 ET
A consultation on changes to pension scheme rules that could cut the value of pensions is about to be launched by the government.
In July, Pensions Minister Steve Webb said he wanted to let occupational pension schemes use the Consumer Prices Index (CPI) for inflation proofing.
It would replace the faster-rising Retail Prices Index (RPI).
Any such change might override existing pension law and the rules of schemes which specify the use of the RPI.
Current legislation makes it very difficult for pension scheme trustees and employers in the private sector to cut the value of pension benefits already promised.
The government has already used its powers to introduce such a change, from April next year, for public sector pension schemes.
Reduced value Since the CPI was first introduced in 1996 it has lagged behind the RPI by an average annual rate of 0.83 percentage points.
That is because it measures changes in the prices of different items than the RPI - principally ignoring mortgage interest payments, council tax, buildings insurance and house-buying costs - and it measures those changes using different arithmetic techniques.
The newly established Office for Budget Responsibility recently estimated that the gap between the two indexes, vital for the inflation uprating of pensions each year, would spread to 1.2 percentage points over the next five years.
Over 20, 30 or 40 years of retirement such a difference would make a sharp cut to the value of someone's prospective pension.
Any change in the rules along these lines would probably also affect the annual uprating of deferred pensions - the pensions of people who have left an employer but not yet retired - and possibly also the annual uprating mechanism embedded in "career average" pension schemes.
The potential saving to pension schemes of adopting CPI was illustrated in November by BT.
Its pension trustees decided that their rules meant they automatically had to use the slower rising measure of inflation, now that it is being used for the state and public sector schemes, and that this would knock £2.9bn off BT's £9bn pension scheme deficit.
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In July, Pensions Minister Steve Webb said he wanted to let occupational pension schemes use the Consumer Prices Index (CPI) for inflation proofing.
It would replace the faster-rising Retail Prices Index (RPI).
Any such change might override existing pension law and the rules of schemes which specify the use of the RPI.
Current legislation makes it very difficult for pension scheme trustees and employers in the private sector to cut the value of pension benefits already promised.
The government has already used its powers to introduce such a change, from April next year, for public sector pension schemes.
Reduced value Since the CPI was first introduced in 1996 it has lagged behind the RPI by an average annual rate of 0.83 percentage points.
That is because it measures changes in the prices of different items than the RPI - principally ignoring mortgage interest payments, council tax, buildings insurance and house-buying costs - and it measures those changes using different arithmetic techniques.
The newly established Office for Budget Responsibility recently estimated that the gap between the two indexes, vital for the inflation uprating of pensions each year, would spread to 1.2 percentage points over the next five years.
Over 20, 30 or 40 years of retirement such a difference would make a sharp cut to the value of someone's prospective pension.
Any change in the rules along these lines would probably also affect the annual uprating of deferred pensions - the pensions of people who have left an employer but not yet retired - and possibly also the annual uprating mechanism embedded in "career average" pension schemes.
The potential saving to pension schemes of adopting CPI was illustrated in November by BT.
Its pension trustees decided that their rules meant they automatically had to use the slower rising measure of inflation, now that it is being used for the state and public sector schemes, and that this would knock £2.9bn off BT's £9bn pension scheme deficit.
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