Gap between RPI and CPI is a £100bn problem for final salary pension schemes

Oliver Gill
Follow Oliver
Tata Steel Prepares To Make Redundancies
Experts have said that the British Steel pension scheme could be kept out of the government pensions lifeboat if inflationary adjustments are made (Source: Getty)

Experts said that today's inflation figures indicate that £100bn could be saved by switching annual adjustments in pension pay outs from the retail price index (RPI) to the consumer price index (CPI).

Defined benefit, or final salary, pension schemes are adjusted for inflation and many have a "hardwire" link to RPI rather than the government's current main reference index, the CPI.

RPI for September was reported today at two per cent, while the CPI was one per cent. Actuarial consultants Punter Southall have estimated that by changing the inflationary reference to CPI, Britain's companies could save an aggregate of £100bn.

Read more: Altmann calls for an end to "bells and whistles"

Joanne Livingstone, a principal at Punter Southall, said the latest data release was "significant" and underlined that the private sector could follow the lead taken by the public sector.

"The government has largely changed its reference inflation index to CPI for its own pension purposes," she said.

The problem is that many of the UK's pension schemes make specific, or hardwired, references to "RPI" in the governing documentation, instead of a looser reference to "inflationary increases" or "the government's standard inflationary measure".

"Whether or not schemes can make a similar switch in respect of past occupational scheme promises is largely an accident of the wording used to set up the scheme in the first place," said Livingstone.

Read more: Tata Steel pensions talks head to Labour conference

Pensions specialist at Old Mutual, Jon Greer, explained why the latest inflation figures were important in the context of defined benefit pension schemes.

"Today’s figures may trigger renewed calls for legislative reforms to allow companies to ditch RPI and move to the more favourable CPI indexation measure," he said.

"This would require legislative change to the Pensions Act 1995, allowing schemes currently applying an RPI-link to move to CPI without member consent. It would be unpopular with consumers, who are likely to see any change as a reduction in retirement benefits in order to cover-up for inadequate planning by employers.

"It is hard to see government taking such a step, given how unpopular it is likely to be with the millions of people currently in defined benefit schemes. However, government will be under some pressure to make changes."

Where a change from RPI to CPI has been suggested recently is in relation to the British Steel pension scheme. The scheme is facing the prospect of falling into the Pension Protection Fund (PPF). Among the enforced changes that would result include changing member pay outs to being linked to CPI.

Nearly all sides (e.g. unions, company, trustees, PPF) appear to be in agreement in accepting a change from CPI to RPI that it is hoped will keep the scheme out of the PPF. However, trustees remain hamstrung from taking action without government intervention.

Related articles