Documents to download

Public service pensions in payment are increased each April in line with prices, measured according to the annual increase in the Consumer Prices Index (CPI) to September of the previous year. This is in line with the statutory requirement to increase public service pensions in payment each year by the same rate as the additional State Pension set out in the Pensions Increase Act 1971 and Social Security Pensions Act 1975.

For more information on State Pension uprating is available in the Commons Library Briefing.

Switch from RPI 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, 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 reduce the generosity of public service pensions and the cost of providing them (PDF). The Government estimated that the switch to the CPI, along with other changes, would save over £400 billion across the 50 years following their introduction (PDF).

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 this would not happen before 2030. This is covered in the Commons Library Briefing Occupational pension increases.

Guaranteed Minimum Pension (GMP) increases

Until April 2016, the main public service pension schemes were contracted-out of the additional State Pension. This meant that an employee and their employer paid a lower rate of National Insurance in exchange for foregoing additional State Pension rights for that period. Between 1978 and 1997, one of the conditions of contracting-out was that the scheme provided a Guaranteed Minimum Pension (GMP) 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 they received indexation on their GMP, while preventing double increases.

With the introduction of the new State Pension in April 2016, the additional State Pension 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. In March 2021, the Government said it would make full indexation the permanent solution.

Documents to download

Related posts