In Reply to: Re: Impact of new PIP increase policy posted by Maurice on 12 February 2006 at 20:44:58:
Hi Maurice,
: I confirm my numbers are the same as yours now Bryan, for 3% RPI (+/- a few % which is due to the way you calculate monthly rates from annual).
I've hopefully removed the error(s) I had in my calculations and revamped the table to be as of constant £s as at April 2006. (See link below)
My numbers are still not quite the same as yours and they show a slightly bigger divergence than yours.
: For my pension planning, the key number I look at is the average real pension paid over 30 years. For a fully inflation linked pension this would be £1000. Under the new IBM rules, and with 3% RPI, it is £813pm, so I need to save approx 20% of my initial pension, to supplement later years, if I want to maintain constant purchasing power. And with RPI of 5% I need to save 30% of my initial pension to maintain purchasing power later on.
I agree that for planning purposes, a 30 year scale is appropriate but should only be used for illustration in the case against the company. For that, primarily, I feel that we should use the 15 year figures as they are the ones that are guaranteed.
: The numbers for 10% RPI are scary, and to be fair 10% RPI for 30 years is unlikely. However the 5 and 15 year figures for 10% RPI show how exposed we now are to a bout of high inflation. I know of no way an individual (as opposed to a large communal pension fund) can hedge that risk - it is impractical to "save for future years" on this kind of scale.
Agreed, it is scary. In the last 30 years we've had at least one period of hyper-inflation (> 10%) and several of high inflation (5% - 10%) so it's not unreasonable to expect much the same over the next 30 years.
: If the pension increases after the "guaranteed" 15 yrs become less "generous" (likely given the even more negligible negotiating power we'll have at that time) the numbers will be even worse than shown below.
With the Defined Benefits plan denied to new employees, the membership of this plan clearly diminishes year on year as you say. Should most DB plan employees accept the company's offer to convert, this decline will accelerate. Should all employees convert (which is presumeably what the company wants) the DB plan becomes a closed plan, which begs a number of questions, like;
Is there legislation governing 'closed plans' versus 'open plans'?
What responsibility does a company have to keep a 'closed plan' fully funded?
Can they sell it off and forget it?
: State Pension at 65 will be a helpful supplement. On the other hand, Pensioner inflation (weighted to services, health care, energy bills, council tax etc) is in fact much higher than RPI.
....and gets higher as you get older.
Both our figures illustrate the drastic impact of;
a) not getting the full increase in RPI in either the 'old' or the 'new' plans.
b) The effect of capping in the 'new' plan as the increase in RPI exceeds the cap.
Personally, I've always accepted the former as this was what I signed up for when I joined the DB plan. And, to its credit, as far as I am concerned, the company has stuck exactly to its side of the contract and awarded us periodic discretionary increases.
On the second point, however, I am far from happy. I know the company is dropping discretionary increases for guaranteed increases, and I'm all in favour of this, but at considerable cost to us. I cannot see the need for capping as, surely, with higher inflation, the assets upon which the fund is built also increase roughly in line (perhaps lagging a bit behind). All capping does is allow the company to take bigger contribution holidays at our expense.
BB