The government is proposing to change the measure of inflation used by private and public sector pension schemes to increase pensions in payment. Increases are currently linked to the Retail Prices Index (RPI) but in future this is likely to be changed to use the Consumer Prices Index (CPI), the measure used by the Bank of England to determine its monetary policy.
The CPI typically rises more slowly than RPI, because it excludes housing costs such as mortgage interest and council tax. The government has argued that this is a more appropriate measure for most pensioners who would expect to have paid off their mortgages by retirement. By changing the inflation measure, it is thought that private sector pension liabilities would be reduced by 10%, or around £100bn, say accountants KPMG.
It is hoped that the savings achieved by this change could help companies to keep final salary schemes open. There is a trend for such schemes to close because volatility of stock markets and an ageing population are increasing the costs and risks of such schemes. However, the changes will not affect all schemes, because many already enshrine a particular measure of inflation in their rules.
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