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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).

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 it considered the CPI to provide “a more appropriate measure of benefit and pension recipients’ inflation experiences than RPI, because it excludes the majority of housing costs faced by homeowners (low-income households are subsidised separately through Housing Benefit, and the majority of pensioners own their home outright), and differences in calculation mean it may be considered a better representation of the way consumers change their consumption patterns in response to price changes.”

Because the CPI generally increases less quickly than the RPI, the change was expected to have the effect of reducing the generosity of public service pensions 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).

In March 2021, the National Audit Office confirmed that using CPI had resulted in a reduced value of pension benefits and contributed to projected reductions in spending on public service pensions (para 1.12).

The RPI is still used by many defined benefit pension schemes in the private sector. In September 2019, the UK Statistics Association 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 that it would not consent to this happening before 2030  – see Occupational pension increases, Commons Library Briefing Paper, CBP 5656, May 2021.

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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