Plan Members in Dark Over Impact of Change to CPI
14 August 2012 (PLANSPONSOREurope.com) –Plan sponsors may have to work harder to communicate how a move from Retail Prices Index (RPI) to Consumer Prices Index (CPI) is affecting member benefits.
Based on results of a YouGov survey of more than 2,000 people in Great Britain over the age of 18 (a repeat of Aon Hewitt’s 2010 survey), Aon Hewitt found that only 16% of respondents felt adequately informed of the relationship between inflation and their pension. This is only a slight improvement on levels of understanding at the time of the switch to CPI, when just 10% of adults felt they had adequate information on the change in the way inflation is measured. When questioned on the differences between RPI and CPI, only 26% of respondents stated that they were aware of them - a decrease of 1% from 2010.
Just 31% of respondents thought that the move would reduce their income in retirement and only 3% thought that it would cut their income by up to 1% a year, which is what Aon Hewitt anticipates.
Lynda Whitney, partner at Aon Hewitt, said: “Two years after the Chancellor of the Exchequer announced the switch from RPI to CPI as the inflation measure for public sector pensions and for statutory revaluations for private sector schemes, the public remains in the dark over the difference between the two, and whether their pension is impacted. Furthermore, the majority of people are unaware of the potentially significant effect that changes in inflation and the move to CPI could have on their income in retirement. While 1% a year may not sound much but over both the period from leaving service to retirement and the retirement period this could lead to a reduction of 25% of their retirement benefit.”
“Most people might need a calculator to reach the precise answer, but I would hope they could think that if 2% of £100 is £2, then £2 a year for 10 years is about £20. But the survey indicated that only a third of people can do this. So with two-thirds of the public unsure of the impact of inflation at such a basic level, the uncertainty over the potential effects of the switch from RPI to CPI isn't surprising. However, the lack of awareness paints a worrying picture of individuals’ retirement planning, which could be incorrect by 25%.
“Inflation - by any measure - is a central factor in the future purchasing power of individuals’ savings and their pension benefits. Both the government and private sector employers need to work to improve the public’s understanding of how inflation affects them. With auto-enrolment bringing many more employees into pension plans, there is no time to waste in ensuring that they know how inflation relates to their pensions, and their likely spending power in retirement.”