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Millions could see £20k cut from pensions under government proposals

Written by: Paloma Kubiak
Members of defined benefit (DB) pension schemes could lose out on around £20,000 of income over their lifetime if government suggestions go ahead. 

The government is considering allowing firms to switch from using one measure of inflation – Retail Prices Index (RPI) – to another – Consumer Prices Index (CPI) –  to calculate pension increases.

The suggestion formed part of a Green Paper published today by the Department for Work and Pensions (DWP) on the future of DB pension schemes.

The government previously switched from RPI to CPI as its preferred measure of inflation for pension purposes in 2010 but as some schemes have to use a specific index, they were unable to switch to CPI. By allowing all schemes to move from RPI to CPI, the government said this “would have significant impact on members’ benefits”.

However, actuary firm Hymans Robertson concedes a move from RPI to the currently lower CPI could take away around £20,000 in benefits over an average DB scheme member’s life and save the government around £90bn in liabilities.

Currently, around 11 million members in the UK rely on a DB scheme for all or part of their retirement income

According to Tom McPhail, head of retirement policy at Hargreaves Lansdown, a £1,000 starting income in 1988 would be worth £2,585 in January 2017 under RPI but £2,105 under CPI.

Tom Selby, senior analyst at AJ Bell, said the government was performing a “£90bn high-wire balancing act on DB pensions”.

“While allowing scheme sponsors to slash liabilities, possibly by switching from RPI to CPI indexation or suspending indexation altogether in certain circumstances, could preserve guaranteed pensions for more people, it would also more than likely reduce the value of these pensions and potentially whip up a storm of protest from trade unions,” he said.

“Clearly the case of BHS and Sir Philip Green looms large here, but equally ministers will be concerned about generating headlines suggesting accrued rights are under threat. Pension promises already built up have historically been sacrosanct, so even a seemingly innocuous reduction in benefits could be viewed as the thin end of the wedge and stir up controversy.”

Selby said that as the Green Paper avoids setting any firm direction of travel, any formal proposals further down the line will need to consider not only any direct impact on DB members and schemes, but also the wider implications for trust in the UK pensions system as a whole.

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