UK - Calculations by the UK Department for Work and Pensions (DWP) have estimated that the shift from the retail price index (RPI) to the consumer price index (CPI) could cut annual pensions by as much as a third.

From April, public sector pensions - and private sector pensions where scheme rules permit - will increase pension payments in line with CPI.

The move was initially predicted to reduce liabilities, with the DWP’s modelling now seeing a £61bn cost reduction for scheme sponsors.

Further predictions in the ministry’s impact assessment, of which a final draft has now been published, state that a member of an occupational scheme earning £39,500 per annum previously could expect to draw an annual pension of £7,250.

However, taking into account the changed statutory minimum revaluation, as well as indexation, the theoretical scheme member could now expect to draw £4,750, or 65% of the previous sum, from his defined contribution scheme.

While this may seem a steep reduction, only one in five of the country’s 2.5m defined benefit scheme members will be affected by the cut, with a further 20% seeing their pensions firmly linked to RPI increases and the remaining three of five likely to see pensions of £5,000 due to differing ways of calculating pension increases.

Increasing pensions in line with CPI is one of the many reforms the current government plans to introduce, with former Work and Pensions minister Lord Hutton due to present a detailed report on public sector pensions prior to March’s budget.

Some schemes have already seen their liabilities cut drastically due to the CPI shift, with the BT Pension Scheme last year announcing its deficit would fall to £2.9bn - from £5.2bn - once the new measure was applied.
 

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