Logo Text

Pension pots shrunk by valuation switch

April 2012

December 30 2011,
by Stewart Hood – (Arcadia Financial Solutions)

PENSION pots have been reduced following a Government switch in the way they are valued and a High Court failure to block it.

The switch from the retail price index (RPI) to the consumer price index (CPI) came into effect in April, after being announced by Chancellor George Osborne in the June 2010 emergency budget. The move will save the Government £6billion a year on public sector pensions.

Two groups, mainly consisting of unions, launched the legal action claiming the move was unlawful, but this month (DEC) the High Court rejected the argument.

This decision has implications for private sector pensions too and financial advisor Stewart Hood, director of the Plymouth office of Arcadia Financial Solutions, said: “A cunning plan might be taking it too far, but the switch from RPI to CPI as a method of revaluing pensions was ingenious if nothing else.

“In simple terms, overnight our pension pots have reduced and to maintain the same expectations in retirement we all need to put more in. It’s all part of the pension crisis playing before our very eyes”.

Mr Hood, a chartered financial planner, said the Government’s method for revaluing state pensions, using CPI rather than RPI, would have repercussions in the private sector, and added: “It seems probable that benchmark will be the industry norm so will have an effect on the private sector too. The change doesn’t seem important but it could affect nearly each and every one of us and in a substantial way, most people receive a state pension of some sort”.

He explained both the CPI and RPI measure “a basket of goods” but stressed there are differences. For example, the CPI excludes most owner occupier costs and the RPI excludes some people at each ends of the social spectrum. “However, the main difference is that RPI uses the arithmetic mean and the CPI the geometric mean as a form of averaging,” Mr Hood said.

Apparently the latter cannot be higher than the former. Clever eh? Arise Blackadder. On that basis pensioners can only lose.

“It’s a technical adjustment but it’s massive – no wonder the unions have contested it, unsuccessfully, in the courts. This will, and the calculations vary, equate to a difference of about one per cent a year on the increase in the value of our pensions and those with future promises of benefits have in effect had their pension pots downsized one per cent a year for the rest of their lives”.

By: Stewart Hood

Leave a Comment

Previous post:

Next post: