Public service pension increases

There is a statutory requirement to increase public service pensions in payment each year by the same rate as the additional State Pension. The additional State Pension is increased in line with prices, now measured according to the annual increase in the Consumer Prices Index (CPI) as at September of the previous year. Further information is available in the Library briefing on State Pension uprating.

Switch to 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). The change to using CPI aimed to use “a better representation of the way consumers change their consumption patterns in response to price changes.”

CPI generally increases less quickly than RPI, which meant that the change to using CPI was expected to reduce the generosity of public service pensions and the cost of providing them. The change was unsuccessfully challenged in the courts by public service trade unions. The Government estimated in July 2021 that the switch to CPI (along with increases in member contributions over the three years from 2012 and structural reforms under the Public Service Pensions Act 2013) will save over £400 billion across the 50 years following their introduction (PDF).

RPI is still used by many defined benefit pension schemes in the private sector. In September 2019, the UK Statistics Authority said it intended to address shortcomings of the RPI by bringing the methodology for calculating it into line with that for CPIH (Consumer Price Inflation including owner occupier housing costs). Following consultation, HM Treasury announced in November 2020 that this would not happen before 2030. This issue is discussed in the Library briefing on Occupational pension increases.

GMP increases

Until April 2016, there were two elements of the State Pension: the basic State Pension, and the additional State Pension. People could choose to ‘contract out’ of the additional State Pension, which meant that they paid lower National Insurance contributions and instead received a higher pension from their occupational or private pension. Until April 2016, when the State Pension changed and contracting out ended, 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, in November 2016 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. In March 2021, the Government said in a statement that it would make full indexation the permanent solution.