Tens of thousands of Britons with cash in one of the country’s biggest employee pension funds have been warned they face being £34,000 worse-off after the Chancellor’s planned changes to inflation measures.
The boss of the BT Pension Scheme, Morten Nilsson, has slammed the rule changes as a ‘massive transfer of wealth’ from pension savers with defined benefit – or final salary – schemes to the pockets of the Government.
While final salary schemes are being shelved by most private sector companies, hundreds of thousands will see their incomes slashed if the changes go ahead in 2030.
All change: Chancellor Rishi Sunak announced planned changes to RPI this week
Around 82,000 of BT Pension Scheme’s 280,000-strong membership look set to be affected by the ditching of the retail prices index which is scheduled for 2030. Younger pension savers and those who live longest will be particularly hard hit.
Mr Nilsson told MailOnline: ‘Aligning RPI with CPIH appears a technicality but it will have very real implications for defined benefit pensioners and pension schemes.
‘Our 82,000 members with RPI linked pensions will be worse off in retirement as CPIH is historically lower than RPI and women will be disproportionately affected as they typically live longer.
‘Perversely, those pension schemes, like BTPS, that have acted prudently and in accordance with best practice by hedging their inflation risk will be most heavily penalised.
‘Furthermore, BTPS has relied on the numerous public statements made in and since at least 2013 confirming that RPI’s methodology would remain substantially unchanged.
‘We estimate, based on calculations as at 30 September 2019, that this reform will reduce the value of the Scheme’s assets by an £3.7bn increasing the overall Scheme’s funding deficit by £1bn.
BT Pension Scheme boss Morten Nilsson
‘While we are pleased that this change isn’t being introduced until 2030, we are disappointed that the government hasn’t put in place any mitigating measures to cushion the huge impact.’
The Association of British Insurers, which represents pension scheme providers, has predicted that the changes could cost pension savers and investors £96billion.
The RPI measure of inflation will be altered in February 2030, saving the Government £2billion a year in interest payments on RPI-linked bonds, the last of which will be issued in a decade’s time.
The RPI has not been used as an official national statistic since 2013, but it is still the figure used for returns on index-linked gilts issued by the British Government. On top of that, it is also used when calculating annual hikes to rail fares and student loan interest.
But, the RPI rate has long been criticised as a measure of price hikes as it frequently overstates them.
With this in mind, following a consultation that began in March, the Government said it would switch to a measure in line with the current consumer prices index plus housing costs, known as CPIH. This stands 0.4 percentage points lower than RPI, but the gap is often bigger.
At the moment, the RPI is used by many traditional pension schemes to increase pension payments every year to ensure people can keep up with the ever-rising cost of living.
Now, the Government plans to change the method by which it is calculated in 2030, which experts claim will typically reduce it by 0.8 to 1 percentage point every year.
What is the difference between a defined benefit and defined contribution pension?
There are two main types of private employer pension systems operating in Britain at the moment, namely defined contribution schemes and defined benefit schemes.
A defined benefit pension scheme, also known as a final salary scheme, is a workplace salary generally based on your salary and how long you have worked at your employer.
Meanwhile, a defined contribution scheme works by you, the employee, and your employer putting money investments (such as shares) by the pension provider. The value of the pension pot can go up or down depending on how the investments perform.
Some defined contribution schemes move your money into lower-risk investments as you get close to retirement age. You may be able to ask for this if it does not happen automatically – ask your pension provider.
This reduction means that, over a period of many decades, private sector pension savers could end up with far less money in their pension pots than they would have had if the rules had not been changed.
Sarah Coles, a personal finance analyst at Hargreaves Lansdown, said: ‘This is a horrible blow for pensioners, who will pay the lion’s share of the eye-watering cost of this move.’
The changes from 2030 will not affect pension savers in the public sector, because they were transferred over to the consumer prices index back in 2011. It will also benefit people buying rail tickets and those looking to get a student loan in future, as price hikes could be lower.
The BT Pension Scheme thinks the changes will results in 82,000 of its members being around £34,000 worse-off. The rest of the scheme’s 198,000 members will not be affected, it told This is Money.
A spokesperson for BT Pension Scheme added: ‘It is difficult to say what the overall effect will be for an individual member as it will depend on a number of factors such as their age at that date the reform is introduced, starting level of pension and gender.’
A spokesperson for the Treasury said: ‘Under the Statistics and Registration Service Act, how RPI is changed is a matter for UKSA alone. This reflects the important principle established in the Act that UKSA’s judgement on statistics should be independent of government.’