David Prosser: Counting the cost of pensions reform
Friday 09 July 2010
Outlook In announcing that final salary pension schemes will soon be allowed to increase pensions in line with the consumer price index (CPI) rather than the retail price index (RPI), the Pensions minister, Steve Webb, yesterday insisted that the former was a more realistic measure of the actual inflation experiences of pensioners. Maybe, maybe not, but let's not pretend this announcement has anything to do with that – the objective of this change to the rules is to ease the pension funding pressures on employers.
That's not unreasonable. The Chancellor announced in the Budget last month that, henceforth, public sector schemes would be allowed to operate on this basis. So it seems only fair to the private sector, which actually has to fund its schemes rather than simply promising to pay benefits, to allow it to do the same.
Still, this is not a victim-free move. Hymans Robertson, the actuarial consultancy, reckons it will save, over the longer term, some £50bn for FTSE 350 companies with final salary pension schemes – this is the amount by which their collective scheme deficits should fall as a result of the move. On the flip side, since CPI inflation has, on average, been 0.7 per cent lower than RPI inflation over the past 20 years, pensioners will see their incomes rise less quickly in future, typically getting increases worth only three-quarters of what they would have got under the current rules.
The Budget announcement was an early attempt to tackle the cost of public sector pensions, becoming a hotter political potato by the day. However, the knock-on effect this time has been further erosion of benefits in the private sector. It's a precedent that should worry all pension scheme members.
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