Pension changes 'are a nightmare', experts warn

Many current pensioners have been promised increases linked to RPI

A group of pension industry experts has attacked plans to link private pension increases to the Consumer Prices Index measure of inflation.

The experts say many pensioners have been promised annual rises linked to the Retail Prices Index.

Philip Read, chairman of British Coal pension trustees, said retrospective legislation could breach their human rights and would be a "nightmare".

The government suggested the change to inflation proofing last month.

'Consistent approach'

Members of an online forum for pensions experts, Mallowstreet, have written to the government, claiming the change has been imposed on the industry and that a full consultation period is required.

The experts on the online forum include Andrew Swan, from M&G Investments, and Karen Wake from ACE insurance.

However, the Department for Work and Pensions (DWP) rejected this, saying that the benefits of public and private pensions needed to be consistent.

The government had "already decided that CPI is the most appropriate measure of inflation for state benefits, [and] it is appropriate to take a consistent approach for private pensions", said a DWP spokesman.

"As the change affects the requirement for statutory minimum increases, schemes may continue to make more generous provision," it added. "No consultation was therefore considered to be necessary."

Big savings

The CPI measure of inflation has generally risen by 0.7% a year less than RPI.

In the next five years the gap between the two is likely to be even higher, at 1.2% a year, according to data from the recently established Office for Budget Responsibility (OBR).

The government now intends to use CPI for the uprating of state pensions, state benefits and also for the inflation-related increases built into the big public sector pension schemes.

These changes will lead to a huge saving in the government's pension costs.

"Pensions linked to CPI will be lower over a period of time - some estimates put the drop as high as 25%", said Dawid Konotey-Ahulu of Mallowstreet.

Mixed picture

The government's powers over private sector occupational schemes are limited as these are governed by their own rules, which in many cases have links to RPI "hard-wired" into them.

Actuarial firm Hewitt Associates has looked at the rules of 168 schemes which are its clients.

In 73% of cases, the rules state that pensions in payment have a link to RPI, with just 10% using whatever the government's preferred measure might be, and 17% have some other sort of measure altogether.

For pensions in deferment though, where someone has left employment but has not yet drawn their pension, the government may have more sway.

Only 12% of the schemes on which Hewitt advises had increases linked to RPI, while 70% state that the link would be decided by the government.

Improvement

Meanwhile the Pension Protection Fund (PPF) has calculated that the UK's private sector company pension schemes moved back into surplus in July.

It says the 6,653 schemes it measured were in surplus to the tune of £7bn, a turnaround from their £22bn deficit at the end of June.

This was similar to their position two years ago but far better than that recorded in July last year when there was a deficit of £109bn.

"Over the year to July 2010, the FTSE All-Share index rose by 15.4%," the PPF said.

"Over the past year, the impact of rising equity markets has outweighed the effect of falling bond yields and led to an overall improvement in the funding position," the PPF said.