Private pensions should be linked to CPI, says minister

The government wants to link private pensions to CPI inflation.

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Friday, 09, Jul 2010 02:05

Pension minister Steve Webb has proposed linking private retirement funds to the consumer prices index (CPI) to create a "more appropriate measure of pension recipients' inflation experiences".

The Liberal Democrat MP said such a move would also bring schemes into line with the measure of inflation used by the Bank of England.

CPI tends to be lower and grow at a slower pace than the retail prices index (RPI), which includes household costs like mortgage interest repayments.

In May, the annual rate of CPI inflation was 3.4 per cent. RPI inflation stood at 5.1 per cent.

Accountancy firm KPMG said that switching indexation for private pension funds from the RPI could cut schemes' liabilities by an estimated £100 billion.

However, savers would also see a slowdown in the growth of their retirement incomes.

Mike Smedley, KPMG's pensions partner, said: "This looks like a sensible change which will align public and private sector pensions and generally reduce the burden on pension schemes."

Nevertheless, he added, the government would have to ensure that any legislation protected savers against a "small print lottery" created by different funds' legal documents.