Millions to see private sector pensions reduced. Millions of people with private sector retirement schemes are likely to see their pensions reduced by as much as 25 per cent after the Government announced plans to change the way they are calculated.
Pensions minister Steve Webb said there were plans to link pension payments to a lower measure of inflation.
Ros Altmann, a governor of the London School of Economics, said: 'It is a crafty move and hugely significant
The existing system links pension increases to the Retail Prices Index which includes housing costs such as mortgage interest payments. But the Government plans to link it to the Consumer Prices Index instead, which is typically lower.
The move would reduce the burden on pension schemes and is expected to be introduced next year.
It would be applied to all final salary pensions, as well as payments made by the Pension Protection Fund – a lifeboat fund for workers who have lost their pensions – and the Financial Assistance Scheme, a Government compensation scheme.
It follows the Chancellor’s announcement in the emergency Budget that most public sector pensions would be linked to CPI, which will also potentially save the Government millions of pounds.
Mr Webb said the same should be applied to occupational pension schemes.
“The Government believes the CPI provides a more appropriate measure of pension recipients’ inflation experiences and is also consistent with the measure of inflation used by the Bank of England,” he explained.
Pensions experts described the move as “crafty”, suggesting that millions of people will lose out.
Ros Altmann, a governor of the London School of Economics, said: “It is a crafty move and hugely significant. It will mean that British pensioners will end up with less money than they would have been expecting.”
Laith Khalaf, a pensions expert at financial firm Hargreaves Lansdown, said: “Final salary schemes just got a break, but at the expense of their members. Millions will be out of pocket as a result of this change. The government is conducting a delicate balancing act between easing pressure on these schemes and protecting the interests of their members.”
If a person starts drawing a pension at 60 and lives until they are 80, they would receive 25 per cent less in the weeks before they died, according to Mr Khalaf.
He calculated that – based on current levels of RPI at 5.1 per cent and CPI at 3.4 per cent - the average occupational pension of £1,600 a year would be worth £4,043 after 20 years if uprated in line with RPI and only £3,020 if uprated in line with CPI.
It means that the pensioners would have lost out on £8,120 worth of income.
Mike Smedley, a pension’s partner at accountants KPMG, said: “It will mean that pensions will increase more slowly which from an individual perspective is not a good thing.”
However, he added: “This looks like a sensible change which will align public and private sector pensions and generally reduce the burden on pension schemes. But we urge the government to make the legislation apply equally to all schemes and avoid a small print lottery for schemes and their members depending on technicalities and details of the Scheme’s legal documents.”
“We estimate that at a stroke this could reduce the collective pensions deficits of the FTSE350’s defined benefit schemes by around £50 billon.”
Patrick Bloomfield, a partner at pensions consultancy Hymans Robertson, said: “The move to enable pension schemes to link future payments to CPI rather than RPI is a ray of sunshine for companies in an otherwise gloomy couple of decades of regulation.
“While moving to CPI will result in pensioners receiving less money in their pocket, in the current climate, where businesses are grappling with substantial deficits, the change is sensible and measured.” ( telegraph.co.uk )
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