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CPI vs RPI

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In June 2010, the coalition government announced that, in future, state and public service pensions would increase in line with the Consumer Price Index (CPI) rather than the Retail Prices Index (RPI). The change aims to help the government cut the UK’s sizeable budget deficit.

CPI does not include housing-related costs such as mortgage interest payments, buildings insurance and council tax. The rate of CPI has therefore tended to run below that of RPI in recent years and the government contends that CPI is a more appropriate measure of inflation because it strips out these costs (which are considered less relevant to pensioners who, arguably, will have repaid any mortgage by the time they retire). To ensure consistency, the government subsequently applied this ruling to occupational pensions. However, this triggered a complex debate over whether private pension schemes would be able to move to CPI. According to a survey by the National Association of Pension Funds (NAPF) published in December 2010, many such schemes have RPI indexation specifically written into their scheme rules. 

The NAPF warned against any ensuing uncertainty, suggesting pension funds might find it difficult to plan ahead. In the same survey, they stated a belief that switching to CPI could increase flexibility for pension funds, but suggested the implications for current and future pensioners needed to be carefully considered to ensure the full facts were understood. Movement among pension funds was swift, however, and KPMG’s 2011 Pensions Accounting Survey showing that many companies have already benefited from making the switch.

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Please note that the information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Pearson Solicitors and Financial Advisers Ltd or any of its members or employees. Professional legal advice should be obtained before taking, or refraining from taking, any action as a result of this article.

This blog was posted some time ago and its contents may now be out of date. For the latest legal position relating to these issues, get in touch with the author - or make an enquiry now.

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