We start with some mathematics. In the last Budget, the Government confirmed that the Basic State Pension will increase by the highest of earnings, prices (based on the CPI) or 2.5% (a ‘triple guarantee’). For 2011/2012 only, the increase is further guaranteed by the increase in the RPI, but this will not be the case in future years. For pension purposes, price inflation is assessed over a one year period ending in September – the CPI for the period ending September 2010 has now been confirmed as 3.1%, RPI is 4.6% and the increase in earnings lags behind inflation. So the Basic State Pension will increase from April 2011 based on the RPI figure of 4.6% (the figure would have been 3.1% without the RPI guarantee).
The Government also announced that public sector pensions will increase in line with the CPI from April 2011 onwards – so pensioners will receive a smaller increase as a direct result of this change. Those with deferred public sector pensions will receive increases on their deferred pension based on the CPI. Those in the private sector still cannot assess the full impact of these changes on their pension schemes as no draft legislation has yet been published although we are expecting consultation imminently. At the annual conference of the National Association of Pension Funds last month, Pensions Minister Steve Webb indicated that it is not the Government’s intention to penalise schemes that provide pension increases in line with RPI, by requiring these schemes to provide a greater increase to pension benefits if the CPI increases at a faster rate than the RPI in any year.