Defined Benefit pensions: Government proposes increases based on CPI rather than RPI (copy)

The Government is considering ways to allow firms to alter Defined Benefit (DB) pension scheme payments.

In a green paper it sets out proposals that would allow firms to up-rate these pensions using the Consumer Price Index (CPI) rather than the Retail Price Index (RPI) each year.

The paper asks: “Should the Government consider a statutory override to allow schemes to move to a different index, provided that protection against inflation is maintained?”

Historically, CPI has been lower than RPI in 22 of the 27 years leading up to 2015.

Companies stand to save £90 billion from the change while 11 million people on these final salary schemes could be £20,000 poorer over their retirement.

As it stands, 75% of pension schemes give pensioners an annual rise based on RPI rather than CPI, and most promise not to lower that amount.

The paper also suggests that if a scheme is really struggling financially, it can suspend payment rises altogether.

Solutions and challenges

Pensions minister, Richard Harrington, said: “We all have a responsibility to ensure the system works in the interests of everyone – employers, schemes and scheme members.

“This Green Paper sets out the evidence we have available about the key challenges facing DB pension schemes and highlights a number of options that have been suggested to us to improve confidence in the system.”

Royal London’s director of policy, Steve Webb, warned the changes proposed would impact retirees’ standard of living:

“The most worrying proposal is to allow certain schemes to ‘suspend’ annual pension increases if money is tight.

“With rising inflation, annual indexation is an important part of protecting the living standards of the retired population.

“There is a significant risk that relaxing standards on inflation protection with the best of intentions for exceptional cases could be exploited and lead to millions of retired people being at risk of cuts in their real living standards.”

The pensions industry is now being asked for its opinions on the Green Paper.

Set up a self-invested personal pension (SIPP) with loveMONEY today (capital at risk)