The Change from RPI to CPI
- What’s all the fuss about?
- What’s the difference?
- How much will I lose?
- What’s the NASUWT’s view?
- What can I do?
On 8 July 2010, the Minister of State for Pensions, confirmed the Coalition Government’s intention to change the basis for future pension increases from the Retail Price Index (RPI) to the Consumer Price Index (CPI) as referred to in the ‘small print’ of the recent Budget statement.
The change affects all public service pensions from April 2011 onwards, including deferred pensions and teachers’ pensions already in payment, and will significantly reduce the level of future pension increases.
This is in spite of the Coalition Government’s programme for government (new window) announcing the establishment of “an independent commission to review the long-term affordability of public sector pensions while protecting accrued benefits” - i.e. pension benefits that you have already built up. The NASUWT submitted its own evidence to the Hutton Commission.
The RPI and CPI are both measures of the cost of living but there are significant differences in the way that the two indices are calculated.
The CPI excludes the majority of housing costs faced by homeowners. The Government believes the majority of pensioners own their home outright and the CPI provides a more appropriate measure than the RPI for protecting pensioners against inflation.
Although the CPI has been higher than the RPI in recent times (for the period September ’08 to December ’09) because it excluded the effect of falling mortgage interest payments, past experience shows increases in the CPI to be consistently lower than the RPI under normal conditions. This is due to differences in the way the two indices are calculated and differences in the ‘basket of goods’ that make up the indices as explained in our Reps Bulletin on the change from RPI to CPI.
The annual rate of CPI inflation used to increase teachers' pensions in April 2011 was 3.1% compared with 4.6% as measured by the RPI. Since 1988, when the CPI was first established, the annual increase in prices as measured by the CPI each September - the month that is used for uprating teachers’ pensions each April - has been on average about 0.7% per annum lower than the increase as measured by the RPI. The Bank of England expects the difference between the RPI and CPI to average about 0.7 to 0.8 percentage points a year in the long run.
On average, therefore, the move from RPI to CPI is likely to result in pension increases between 0.5% and 1% lower every year, throughout your retirement. Even with a modest difference of 0.5% per annum, the link to CPI would result in a total loss, over 20 years on lower increases, in the region of £1,500 for every £1,000 of a teacher’s annual pension - and a total loss of almost £15,000 over 20 years on a typical teacher's pension of £10,000 pa . Although it depends how high the rate of inflation is, an average difference between RPI and CPI of 0.75% per annum will result in a total loss of more than £20,000 on an annual pension of £10,000 after 20 years on the lower CPI increases. Realistically, the change to CPI could mean a teacher on a typical pension will be tens of thousands of pounds worse off over many years of retirement.
You can calculate the impact of the change from RPI to CPI on your own pension using the NASUWT's RPI to CPI ready reckoner.
Members have contributed towards the teachers’ pension schemes in England and Wales, Scotland and N Ireland - and planned for their retirement - under the clear impression that their pension would increase in line with the RPI.
Now the Government have unilaterally changed the ‘rules’ on pension increases - even for teachers who have already retired and drawn their pension.
The NASUWT believes that reducing future increases to pensions already earned in this way is morally indefensible and a breach of the previous promises to increase pensions in line with the RPI.
It not only contradicts the Government’s promise to protect accrued pension rights, it seriously undermines their declared policy of encouraging individuals to save for their retirement.
The NASUWT has applied for a judicial review of the Coalition Government's decision to change the basis of public service workers' pension increases from RPI to CPI. The case will be heard in October 2011. For an update on developments go to Pensions Latest.
Whatever its legality, the NASUWT believes the change is a cynical breach of promise by this Government that will cost teachers thousands of pounds during their retirement.
The NASUWT and other unions have challenged the legality of the change in the courts. In December 2011 the High Court ruled against the Unions’ argument that pensions should increase in line with RPI. The Union remains committed to restoring the RPI link and, along with other unions, has lodged an appeal against the High Court's decision, which on one key issue was only a majority decision.
You can support our commitment to protecting public sector pensions by visiting your local MP or by contacting your MP (new window) at the House of Commons and telling them how much you will lose as a result of the Coalition Government’s decision to change from RPI to CPI and what you think of it.