Britain’s current economic realities hardly lift the spirits. And now many public pension scheme members face the disappointing prospect of lower pensions.

This has arisen through the Government recently announcing a switch in statutory indexation from the Retail Prices Index to the Consumer Prices Index for public sector pension schemes. The impact of this reduction has reached defined benefit/final salary schemes.

The switch to CPI has been made in response to the ongoing search for ways to cut costs and the reasoning is backed by the Department for Work and Pensions’ argument that CPI is more appropriate for measuring pensioner inflation than RPI because housing costs are not included.

RPI is the cost of a typical basket of goods for a household whereas CPI is also a basket of goods but does not include mortgage interest payments, council tax and some other housing costs. CPI now represents the main inflation rate in the UK.

It was originally thought that there would be a legislation override for those schemes with only the RPI indexation definition. We are talking about around 61 per cent of all schemes according to the National Association of Pension Funds (NAPF). Now it seems this will not be the case and those schemes will be left with an increased liability.

For those schemes where the switch to CPI is followed, this will leave many pension members with a lower pension than originally thought as their accrued rights rise more slowly with a wider range of inflation categories.

The most recent statistics show that CPI stands at 4.5 per cent for April (4 per cent in March) and RPI is 5.2 per cent (5.3 per cent in March). The Office of National Statistics also states that the last time CPI was higher was September 2008, at its record peak of 5.2 per cent.

Of the various factors at work, the largest upward pressures on CPI inflation came from transport, alcohol and tobacco, gas bills, sewerage collection and rental costs. Conversely, the downward pressures were shown in appliances, personal care products, transport insurance, clothing and footwear.

In the Bank of England’s letter to the Chancellor of Exchequer George Osborne explaining why inflation is above the two per cent target, Mervyn King states “the current high level of inflation reflects three main influences: the increase in the standard rate of VAT in January to 20 per cent, higher energy prices and increases in import prices”.