Final Salary Pension Schemes To Get Cut Due To Pension Changes

Final salary pension schemes to get cut due to pension changes


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Final salary pension schemes to get cut due to pension changes

The Pensions Minister Steve Webb said that pension payments could become linked to the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI)

The government have announced plans to change the measure of inflation which is used to calculate the payments of pensions. This means that millions who have invested in a private sector pension plan are almost certain to see their pension income cut.

Steve Webb said that there were plans to change the calculations of pension payments from the Retail Price Index (RPI) to the Consumer Price Index (CPI). Historically, the CPI is lower than the RPI which includes housing costs such as mortgage interest payments while the CPI has nothing to do with that.

Accounting firm KPMG say that the pension liabilities of companies could be cut by 10% (£100 billion) but pensioners can expect to lose out when the time comes for them to collect their pension. This income could possibly be hit by up to 25%.

While this is bad news for policy holders, the CBI were delighted with the news. Their head of employment and regulations, Neil Carberry, said that final salary scheme’s biggest single cost is statutory indexation. He believes that the CPI is a more accurate reader of inflation than the RPI which is important for pensioners. He also mentioned that CBI hoped the government will come up with legislation that overrides the rules of certain schemes which currently make them unable to implement any changes.

George Osbourne said in last month’s special emergency budget that public sector pensions and benefits will be linked to the CPI from now on and this measure would save millions of pounds for the government.

The Liberal Democrat Webb said that this alteration should also be implemented in private sector pensions. In a statement, Webb stated that the CPI was a more accurate representation of pension saver’s inflation experiences and is also the same measure of inflation that the Bank of England uses. He concluded by saying that the government felt that it was right to use the same index to decide increases for all payments and pensions that the Financial Assistance Scheme and the Pension Protection Fund used.