Consumer Price Index (CPI) May Impact your Pension Scheme
The CPI has dropped back to zero again this month after rising slightly since February. To understand why this may affect your pension you have to understand that the CPI is used by economists to measure inflation, and to judge the impacts of government economic policy. It is also used to record price changes of essential items we need to live, including pensions, wages, maintenance, and tax allowances.
The current rate of CPI has been greatly influenced by the drop in fuel and food. Current thinking is that as oil prices go down, CPI will move into negative territory. Once oil prices are no longer a factor, CPI will rise again.
At this time however, pension schemes that link to CPI will not have to increase payouts. This will almost certainly impact people receiving compensation from the Pension Protection Fund.
Richard Gibson of Barnett Waddingham said:
“This could be good news for some pension schemes and employers who are struggling with increased liabilities.
“Many pension schemes set their benefits according to the rate of inflation each September, by which time we could see CPI back closer to its 2% target.
“Those more likely to be affected are former employees of insolvent companies who are receiving compensation from the Pension Protection Fund (PPF) lifeboat. The PPF pays out increases based on inflation in May each year so a dip lasting a few months will mean lower pensions in future for them.”
When you factor in what affects the price of fuel: The Bank of England’s theory that it is caused by rising demand rather than less demand. (Production increases in the manufacturing sector are largely responsible for this) It soon becomes clear that the CPI and other economic statics are influenced by complex economic issues.
However, Ben Brettell pointed out that opinion was split in the Bank of England on the risk of deflation. He said:
“I believe a cut in interest rates looks most unlikely, but with inflation at zero and deflation looming it is almost impossible to see them rising either. It therefore appears interest rates will be stuck at 0.5% for some time yet – I don’t see them rising until mid-2016 at the very earliest.”
And all of this impacts on your pension.
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