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As if UK final-salary pension schemes were not in enough trouble already, the UK Government has just introduced another drawback.
These "defined-benefit" pension schemes, that are frozen from further contributions when the pension member emigrates, have always been subject to restricted growth. Some 8 different indices are used in calculating the effect of inflation but hitherto the Retail Price Index (RPI) has been the default index. Until now the pension schemes' actuaries allowed the value of benefits to combat inflation by increases in line with RPI - but capped at a maximum of 5% p.a.
This maximum has just been reduced to 2½% p.a. In other words, unless the value is transferred elswhere the pension cannot grow at a higher rate than 2½% p.a. RPI is currently at 0%. Not much joy in that.
Tim Carroll
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