Rail Pension Scheme Inflation Cap

[21C101]

With CPI set to be about 10% in September, does the Railways Pension Scheme have an cap on annual increases of eg 5% or will railay pensions increase by the full CPI?

I can see consequences either way:

If there is a cap then pension gets whittled away by inflation.

If there isn't a cap ballooning pension scheme deficits could put the whole pension scheme in jeopardy.

Anyone know either way?

 

[thedbdiboy]

I don't think there's a cap, but over time, high inflation is matched by higher investment returns so your concerns about a deficit are not necessarily true. Indeed, pension schemes deficits have become entrenched due to artificially low bond and interest rates caused by Quantitive Easing and similar fiscal measures.
Pension Schemes are long term investments and don't manage surplus and deficit on a month by month basis. I would go so far as to say that if the world economy is shifting after 20 years to a higher set of interest rates and underlying inflationary pressures, that will at last begin to address some of the worst pressures on pension scheme funding pressures as they can 'price in' a more sustainable set of returns for their long term investments.

 

[JamesT]

I don't think there's a cap, but over time, high inflation is matched by higher investment returns so your concerns about a deficit are not necessarily true. Indeed, pension schemes deficits have become entrenched due to artificially low bond and interest rates caused by Quantitive Easing and similar fiscal measures.
Pension Schemes are long term investments and don't manage surplus and deficit on a month by month basis. I would go so far as to say that if the world economy is shifting after 20 years to a higher set of interest rates and underlying inflationary pressures, that will at last begin to address some of the worst pressures on pension scheme funding pressures as they can 'price in' a more sustainable set of returns for their long term investments.

Though if the railway scheme is anything like the USS one in the HE sector, the pensions regulator is very keen that deficits are addressed. This is compounded by a push to “de-risk” by investing more in things like bonds. As you say, bonds are currently performing extremely poorly, which makes the deficit even worse. Having the every three year valuation in the middle of the pandemic didn’t help either.

 

[21C101]

Though if the railway scheme is anything like the USS one in the HE sector, the pensions regulator is very keen that deficits are addressed. This is compounded by a push to “de-risk” by investing more in things like bonds. As you say, bonds are currently performing extremely poorly, which makes the deficit even worse. Having the every three year valuation in the middle of the pandemic didn’t help either.

Typically when inflation is high interest ratrs are a couple of % higher. So inflation 10% interest rates 12%, which enables investments to to some extent keep up.

We are now heading for 10% inflation with 1% interest rates which can only be disastrous for pension funds.

 

[thedbdiboy]

Typically when inflation is high interest ratrs are a couple of % higher. So inflation 10% interest rates 12%, which enables investments to to some extent keep up.

We are now heading for 10% inflation with 1% interest rates which can only be disastrous for pension funds.

Pension funds do not invest solely in high street or safe investments - they use a variety of financial vehicles. The push for de-risking investments has been a challenge but everyone is making the mistake that 10% inflation and 1% interest is some sort of permanent change. The full paying in period for a pension is 40 years. Back in the 70s, inflation hit 23% at one point with interest rates at 11% but that didn't persist. The biggest squeeze on pensions has been the artificial creation of 'free money' in the past 16 years to try and stave off economic stagnation. The next few years are going to be rough economically but you need to remember:
- if you are a railway pensioner now, you are being paid on the back of decades of investment returns, not what happened this year or last year;
- if you are a railway worker, your pension will be paid based on a fund that invested over your career, not just what happened this year or last year.

A very important note is the that railway scheme is a funded and invested pension - it is not like most public sector ones which have no 'fund' and which just pay out from Government coffers where the pension 'contributions' go.

 

[172007]

Is the OP question not aimed at the actual yearly pension a member receives. Many schemes have a cap so, if your pension is £20,000 inflation is 8% but the yearly increase in the pension is 5% then your pension is getting smaller. It like if inflation was 0% and they take 3% off you so you pension is now £19'400

 

[station_road]

It may also depend on which section of the Railway Pension Scheme you are in - the Network Rail section was in surplus at the last full valuation, for example. The RPS is generally in better shape than many final salary schemes, partly because people can still join it so contributions are coming in

== Doublepost prevention - post automatically merged: 15 May 2022 ==

Is the OP question not aimed at the actual yearly pension a member receives. Many schemes have a cap so, if your pension is £20,000 inflation is 8% but the yearly increase in the pension is 5% then your pension is getting smaller. It like if inflation was 0% and they take 3% off you so you pension is now £19'400

The RPS doesn't have a cap,increases are made based on CPI in September, taking effect in April the following year. Increases this year were 3.1% (based on the sections I am aware of - there are many different sections of the scheme though, so best to check the rules of the one you are a member of)

 

[Dai Corner]

Pension funds do not invest solely in high street or safe investments - they use a variety of financial vehicles. The push for de-risking investments has been a challenge but everyone is making the mistake that 10% inflation and 1% interest is some sort of permanent change. The full paying in period for a pension is 40 years. Back in the 70s, inflation hit 23% at one point with interest rates at 11% but that didn't persist. The biggest squeeze on pensions has been the artificial creation of 'free money' in the past 16 years to try and stave off economic stagnation. The next few years are going to be rough economically but you need to remember:
- if you are a railway pensioner now, you are being paid on the back of decades of investment returns, not what happened this year or last year;
- if you are a railway worker, your pension will be paid based on a fund that invested over your career, not just what happened this year or last year.

A very important note is the that railway scheme is a funded and invested pension - it is not like most public sector ones which have no 'fund' and which just pay out from Government coffers where the pension 'contributions' go.

They have also been affected by political interference such as the Conservatives' forcing contribution holidays to reduce surpluses and Labour's tax raid.

 

[Snow1964]

Nearly all schemes have an inflation adjuster.
Some use RPI, some CPI

Generally it is based on rate in a specific month and gets applied 2-6 months later (it takes about 3 weeks for inflation to be published, so can’t be done following month, as wouldn’t be time to process the changes).

 

[Watershed]

RPS pensions are increased in line with orders made by the government under the Pensions (Increase) Act 1971 (the orders, broadly speaking, determine the increase in civil service pensions). In April 2011, the government switched to using CPI rather than RPI in an attempt to save money.

Accordingly RPS pensions are, in practice, indexed using CPI - although there is theoretically nothing forcing the government to make an increase order each year, and in exceptional circumstances I wouldn't rule out the possibility of pensions being frozen.

Some sections of the RPS have a maximum increase (Network Rail's CARE is 5% I believe) but most are uncapped. Generally most sections of the RPS are well funded and so even a higher rate of inflation should not impose an immediate issue.