One letter makes a big difference to final salary pensions!
Sometimes the most innocuous sounding announcement can have a big impact. Steve Webb, the new Pensions Minister, threw a lifeline to final salary pension schemes in the private sector recently by allowing them to amend their scheme rules to use the lower Consumer Pries Index (CPI) to uprate their pensions in payment and deferred or preserved pensions rather than the Retail Prices Index (RPI ).
To illustrate the difference this could make the RPI is running 5.1 % at present whereas the CPI is only 3.4%. Actuaries have calculated that this could mean significantly lower pensions overall, naturally the higher the salary on leaving the bigger the predicted loss. Those of us with preserved final salary benefits, and I’m one of them, have recently seen their pension rising higher than the salaries of those still working for the same employer, but that is all set to change.
Of course, one could argue that helping final salary schemes to cut their deficit may mean that some remain open when they would have closed, however there are few such schemes open to new or existing employees, such has been the downturn in stock market returns leading to huge deficits. In fact, in the FTSE 100 only four schemes remain open to new members.
Steve Webb has made this move on the basis of levelling the playing field as, for example, state benefits will in future be based on CPI increases not RPI. The reason the two differ is that RPI includes mortgage and council tax costs so rises more quickly than CPI. On average there has been a 0.75% differential.
The only solution for members who are still in employment is to increase their pension saving through AVCs if these are available, or take out an additional personal pension, which of course is also an option to those deferred members who will now have to rework their retirement calculations.
Kate Upcraft
Payroll writer and lecturer
