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Government under pressure to review inflation rules for pension schemes

The UK government is today under pressure to review the proposed change in final salary pension scheme calculations which would allow scheme trustees to use the consumer price index as opposed to the retail price index. While both are measurements of the UK economy and the cost of living, the consumer price index is currently running at 3.2% while the retail price index is running at 5%. While in the short term this may seem academic and of little relevance, in the longer-term the impact could be huge!

If you consider that you may well be in a pension scheme for in excess of 40 years then the difference between a 5% annual increase and a 3.2% annual increase (at current rates) could equate to a reduction in your overall pension payments of around 25% upon retirement. While this will obviously take some short-term pressure off the UK pension industry, and the final salary sector in particular, the problem is that any reduction in personal pension payments will eventually place more pressure upon the UK benefits system.

As a consequence on the potential long-term impact of these changes, Iain Duncan Smith is under immense pressure to review his initial proposals which the government is looking to implement without consultation with the sector. Surely the government has little choice but to enter a consultation period?

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