CPI and your pension
On page 11 of the booklet all USS members recently received you will see a section entitled ‘What pension increases can I expect to get?’ There, it explains that the ‘annual increases to official pensions, usually effective from each April, are linked to changes in inflation over the 12 months up to the previous September’. So, as regards next April, yesterday’s published figure of 5.2% applies. The blurb in the booklet here does not explain that CPI is the measure applied, not RPI. RPI is a more honest figure for the calculation of inflation, because it includes the cost of mortgage rises. More of that below.
The USS booklet then goes on to continue to avoid mentioning CPI, and uses ‘official pensions’ as a euphemism, or synonym, for CPI. It sounds more unavoidable, more authoritative, perhaps. So, when the term ‘official pensions’ is used in that paragraph, reproduced here below, you can replace it with ‘CPI’:
“Pension increases for service built up after 30 September 2011 are matched up to 5% a year, however, if official pensions increase by more than 5% then USS will match only half of the difference up to a maximum increase of 10%. So, if official pensions increased by 15%, USS increases would be 10% in that year. Benefits built up before 1 October 2011 will increase fully in line with official pensions.”
Now, let us unpack two things here. Firstly, there is a distinction drawn between everything you have paid in to your pension (and employer contributions) up to last month, and everything you are going to pay in (and the employer). Secondly, there is information about how these two different sets of contributions are going to be dealt with in your retirement. Nowhere does the leaflet give you any examples of this, or offer the calculating formula.
So, it seems, your pension – the sum you get each month in retirement (as calculated on page 9 of the USS leaflet) – will in fact be made up of two parts. One part which will rise each year in line with CPI, and another part which won’t fully. The second part will rise in line with CPI up to 5%, but after that, anything above 5% will only rise by half as much. So, 6% CPI will see a rise of 5.5% in your pension (5% plus half of 1%) and a 7% rise in CPI will see a 6% rise in your pension (5% plus half of 2%). What it doesn’t mention is that 15% is the ‘hard cap’. If CPI goes above 15%, you will not get anything more than a 10% increase to your pension (5% plus half of 10%).
So, in April next year, the recently announced 5.2% rise in CPI will result in a 5.1% rise in the USS pension. Meanwhile, ironically, official pensions will rise by 5.2%, as they don’t have such a capping mechanism.
We believe this is unnecessarily complex and unfair, and should be re-negotiated. And, of course, new members to the scheme now have the ‘career averaging’ method of pension calculation. That’s a whole different blackboard.
Curiously, when we rang USS and asked if it was the case that the pension increase will be calculated two ways, one for contributions before 1/10/11 and one for contributions after, the representative quite confidently said ‘no, everything is calculated according to the limitations on CPI’. Worrying.
By the way, RPI is currently 5.6%, and a more realistic measure of the financial increases people actually have had to shoulder. Some people will tell you that USS had no choice but to switch to using CPI instead of RPI because the scheme follows the measure used by official pensions, and so when official pensions switched to CPI, then our pension had to too. This is partly true, but it was also within the power of our trustees to break the link with official pensions.