Major pension upset was averted when ministers decided not to wipe £90 billion of defined pensions at a stroke of a pen.
Hidden in the small print of Prime Minister Theresa May’s flagship pensions white paper was a clause explaining the inflation measure direct pensions should be rated against.
The fear was the government would opt for the consumer price index (CPI) – the standard measure of day to day inflation in the UK.
The alternative was to keep the retail price index (RPI). The RPI generally returns a higher inflation rate because the number crunching involves housing costs, which are excluded from the CPI.
Last year’s green paper on pensions flagged CPI as the favoured measure for the government.
No pension cut for workers
Switching would allow companies to revalue their funds in future at a lower rate of inflation, which would see billions struck off their deficits – the amount between what they must pay in pension benefits and the cash and investments they have in the bank to cover the liability.
Surprisingly, somewhere along the decision-making process, the government has changed tack and decided to stick with the RPI and has well and truly buried any possibility of helping firms reduce their pension liabilities by cutting retirement benefits for workers.
“Having carefully considered the financial impacts and the consultation responses we have concluded that we cannot accept any reduction in the value of member benefits and are therefore ruling out provision of a power for employers or trustees to change scheme rules so that schemes can apply inflation increases using CPI instead of RPI,” the government said.
“Any across-the-board change would allow sponsoring employers to reduce their liabilities at expense of their members even if the employer had no difficulties in meeting their existing liabilities.”
For once, the government came down in favour of the retirement saver rather than the fat cats of the pension industry.
The paper suggests switching inflation measures would have sliced £12,000 off an employee total pension income if they retired with an income of £8,000 a year with CPI running at 2% and RPI at 3% over 20 years.
May based her keynote speech on employer pensions on the same white paper.
In her speech she pledged to punish employers who shirked their pension responsibilities.