Financial Times - Up to 10 million UK pensioner face being worse off under reforms

Excerpt from FT article posted below:

Proposals to change way annual increases for defined benefits calculated.

More than 10m individuals in the UK with traditional final salary-style retirement benefits would be £30,000 worse off under proposals to change the way annual pension increases are calculated, according to new analysis.

Currently, most people receiving income from “defined benefit”-style pensions in the private sector have annual rises in payments linked to the retail prices index, which measures the rise in the cost of a pre-determined basket of goods, including housing costs.

But shortcomings with RPI have led the government and the Office for National Statistics to set up a consultation on reforms that is set to close in August, which could see workplace pensions and other benefits rise more slowly each year. The ONS estimated in 2016 there were more than 13.5m members in private sector defined benefit schemes.

Under changes to the RPI methodology which would come into force by 2025 at the earliest, the annual measured rate of inflation would be lower, on average, by 1 percentage point a year, according to the consultation document.

Insight Investment, an asset manager, has calculated that linking defined benefit pension increases to CPIH, or the Consumer Prices Index with Housing costs, will mean tens of thousands of pounds less income for defined benefit pensioners.

“Insight Investment’s analysis shows that a member of a defined benefit pension scheme who is retiring at age 65 on a starting income of £20,000 could lose in excess of £30,000 over the course of their retirement,” said Rob Gall, head of market strategy at Insight Investment.

“If RPI is simply aligned with CPIH we believe this would significantly reduce the pension fund benefits received by end members.”

Barnett Waddingham, an actuarial consultancy, has separately calculated that someone currently aged 50, with an RPI-linked pension paying £10,000 annually from age 60, would have previously expected to receive about £500,000 in total if they lived to the average age of 90.

If the government goes ahead with the proposed changes, the member’s total payments would be reduced to about £425,000, it found.

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