CHANGE TO YOUR PENSION INCREASE FROM APRIL 2011
The Chancellor of the Exchequer announced in his June 2010 Budget that the method by which public sector pensions are increased, will change from 2011. The Local Government Pension Scheme (LGPS) is an ‘Index-linked’ pension scheme, which means the pensions paid from it keep up with inflation. However from April 2011, pensions will be increased in line with the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI).
What is Inflation?
Inflation is the amount by which prices rise over time. The inflation rate gives us a snapshot of how much prices have risen over a 12-month period.
How is it measured?
Every month the Government announces the Retail Prices Index (RPI) - also known as the headline rate of inflation - which shows the percentage price rise over the past 12 months. This was set at 100 in January 1987. In March of 2010, it was 220.7. In March 2009 it was 211.3. This represents a rise of 4.4%.
Until April 2010, the Retail Prices Index has been used to calculate increases in State pensions, public sector pensions, some State benefits and student loan rates. The Coalition Government in its June 2010 Budget, amended how public sector and state pensions will increase in future. From April 2011, they will increase in line with the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI).
How is the index calculated?
The Government takes a 'shopping basket' of more than 650 goods and services on which we typically spend our money - from bread and ready-made meals to a pint in the local pub - and comes out with an average price.
Why was the June 2010 inflation figure reported as 5.0% by some and 3.2% by others?
The 3.2% is the Consumer Prices Index (CPI) rather than the RPI. The main difference is that the CPI does not include any housing costs, such as the effect of mortgage rates or council tax.
Do prices always rise?
No. When the average cost of the shopping basket falls from year to year, it is known as deflation and RPI returns a negative figure. This happened in 2009, when RPI recorded for September was -1.4%.
If inflation was 4.4% in March 2010, why didn’t my pension increase by that figure?
Because the pension increase in April 2010 was based on the RPI figure from September 2009, not the latest one. This actually showed a year-on year drop in prices of 1.4%, although pensions were not reduced by 1.4%.
How is this change likely to affect pensions in future?
Historically, RPI, which includes mortgage rates, has been on average about 0.75% higher than CPI. Below, is a table comparing the September rates of CPI and RPI since the year 2000:
| CPI (%) | RPI (%) | |
| 2000 | 1.0 | 3.3 |
| 2001 | 1.3 | 1.7 |
| 2002 | 1.0 | 1.7 |
| 2003 | 1.4 | 2.8 |
| 2004 | 1.1 | 3.1 |
| 2005 | 2.5 | 2.7 |
| 2006 | 2.4 | 3.6 |
| 2007 | 1.8 | 3.9 |
| 2008 | 5.2 | 5.0 |
| 2009 | 1.1 | -1.4 |
