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There is a statutory requirement to increase public service pensions in payment each year by the same rate as the additional State Pension i.e. in line with prices (now measured according to the annual increase in the Consumer Prices Index to September of the previous year). (Pensions Increase Act 1971 and Social Security Pensions Act 1975 ss59-59A. HM Treasury, Guidance on the operation of increase legislation for public service pension schemes, April 2016).

In line with this, public service pensions in payment will increase from 6 April 2020 by 1.7 per cent, except for those public service pensions which have been in payment for less than a year, which will receive a pro-rata increase (HCWS 123, 25 February 2020).

Switch to the CPI

Until April 2011, the measure of prices used was the Retail Prices Index (RPI). However, in the June 2010 Budget, the Coalition Government announced that it was switching to the Consumer Prices Index (CPI) (para 1.106). The reason was that…

Because the CPI was expected to increase less quickly than the RPI, this had the effect of reducing the generosity of public service schemes and the cost of providing them (IFS, 2012 Green Budget, p110). The change was unsuccessfully challenged in the courts by public service trade unions. (R v Staff Side of Police Negotiating Board and Others; [2011] EWHC 3175 (Admin).

UK Statistics Authority plans to address shortcomings in the RPI by bringing in the methods used to calculate CPIH (CPI including owner occupier housing costs) are discussed in Commons Library Briefing Paper CBP 5656.

GMP increases

Until April 2016, the main public service pension schemes were contracted-out of the additional State Pension. Between 1978 and 1997, one of the conditions of contracting-out was that the scheme provided a Guaranteed Minimum Pension (GMP). This was designed to ensure that individuals were not worse off as a result of having contracted-out. There was a complex arrangement for ensuring that the GMP was increased each year – with the pension scheme responsible for indexing part of it and the rest of it effectively delivered through the additional State Pension. For public servants, there were special arrangements to ensure that public servants received indexation on their GMP, while preventing double increases.

With the introduction of the new State Pension in April 2016, the additional State Pension (which formed part of these arrangements) was removed. While it looked for a permanent solution, the Government put in place temporary arrangements, committing to full indexation of GMPs earned in public service for people who reach State Pension before April 2021 (HM Treasury, Consultation on indexation and equalisation of GMPs in public service pension schemes, updated January 2018). In March 2021, the Government said it would make full indexation the permanent solution (HCWS871, 23 March 2021).

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