RPI and CPI gap to cost public sector pensioners more

Public sector workers from the GMB, Unite and Unison unions picket outside the Queen Alexandra Hospital in Cosham, near Portsmouth
Image caption Public sector pensions will be held back more than anticipated

Public sector pensioners are expected to lose thousands of pounds more due to the increasing divergence between different measures of inflation.

In 2010, the government said their pensions should rise in line with the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI).

The aim was to save money because the CPI is designed to rise more slowly.

The government is now assuming the gap between the measures will widen from 1.2 to 1.4 percentage points a year.

The revised assumption was published on Tuesday by the Office for Budget Responsibility (OBR) as part of the government's Autumn Statement.

If the new estimate turns out to be correct, the widening gap between the two inflation measures will offer a further 17% saving to the government on the cost of inflation-proofing public sector pensions.

The OBR forecast that by 2016 the gap between CPI and RPI could be as high as 1.8 percentage points, predicting that CPI will go down to 2% by then while RPI stays higher at 3.8%.

"This new assessment of inflation by the OBR is likely to be good news for the sponsors of defined benefit pension schemes in both the private and public sectors but bad news for individual pensioners," said Lynda Whitney, of actuaries Aon Hewitt.

Further £6,066 loss

If someone retired on an annual pension of £10,000 a year (a typical figure for a teacher), then over 20 years the uprating of their pensions by just 2% (the Bank of England's CPI target) would see them accrue total pension payments of £245,500.

The previous assumption put RPI 1.2 percentage points above CPI at 3.2%.

If the retirees' pensions were uprated each year by that amount they would receive total payments of £278,857.

If 3.4% RPI were applied, reflecting the 1.4 percentage point gap, the pensioner in question would receive £284,923.

Thus, last year's adoption of CPI as the relevant measure of inflation will now cost the pensioner in this example a further £6,066 over 20 years, amounting to £39,423 in total.

Several public sector trade unions and the government are awaiting the outcome of a legal challenge the unions launched in the High Court against last year's sudden switch from RPI to CPI.

The judicial review was heard in October and a decision is expected to be handed down in early December.

If the unions are successful, it will throw the government's policy into disarray and save the affected pension scheme members thousands of pounds of pension income they would otherwise lose.

Private and public

TUC general secretary Brendan Barber said: "The switch to CPI inflation is a government attack on public sector pensions."

"This stealth cut to pensions blows another huge hole in the government's false claims that pensions are staying the same for public sector workers.

"It's now pay more, work longer and get even less," Mr Barber added.

The impact of using CPI rather than RPI on those private sector schemes that can adopt the slower-moving measure, was assessed by the Department for Work and Pensions in July 2011.

It calculated at the time that the schemes would save collectively £3.342bn a year.

A further 17% saving suggests they would save £550m more.

Mike Post, a former BA pilot who has been leading a campaign against the use of CPI in one of BA's biggest pension schemes, said: "This projection brings into even starker relief the damage being done to future pension increases anticipated by private sector pensioners whose schemes follow CPI rather than RPI."

Government savings

The new CPI inflation-proofing policy was first applied in April this year.

It saw pensioners in schemes covering civil servants, teachers, NHS employees, local government and others, receiving an increase of 3.1% instead of 4.6%.

In this year's Budget the government published estimates suggsting that the widening gap between CPI and RPI would push its annual saving up from £7.56bn in 2014-15 to £10.6bn in 2015-16.

However, that saving covers not only public sector pension schemes but also state benefits and tax credits, which are also affected by the new policy.

"Looking at public sector pension liabilities, OBR's own figures showed liabilities of £1.13tn at 31 March 2010," said Lynda Whitney.

"An increase in the gap between RPI and CPI of 0.2% means that the government saves an estimated £45bn more than expected in the long term.

"It will also help the private sector pension schemes close their deficits by more than they originally expected. Now if the gap is considered to be 1.4% a year this reduction in deficits will double to £50bn."

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