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Is nothing safe for pensioners anymore?

John Greenwood says the Government’s move to link pensions to CPI rather than RPI shows that nothing is safe in the market these days.

When David Cameron told a TV audience shortly after the election that nothing pensioners had already accrued would be taken away from them, they were understandably reassured. Now their pensions have been downgraded to an inferior level of inflation protection, millions of retirees will be wondering how they have been duped.

Most of us agree that it is only fair to taxpayers, employers and the younger generation that the costs of final-salary schemes should be reined in. But while making cuts to future accrual or stopping it altogether is one thing, reducing accrued rights is a different thing altogether. The Government should not underestimate the psychological effect that moving the goalposts on millions of pensioners’ income will have on its poll ratings.

Whatever the small print may say, retired members of schemes in both the public and private sector will perceive that they used to have a pension linked to RPI and they now have a less valuable pension linked to CPI. If the last 20 years’ economic statistics are repeated, that means a 60-year-old retiring today will be 14 per cent worse off by the time they are 80, according to the TUC.

Most of us can deal with pay freezes or even cuts – we can work longer, pay more pension in and hope things will get better in future. And even if a pension scheme is closed to future accrual, at least its members know where they stand. But pensioners are right to have a dread of retrospective changes such as those announced by Steve Webb earlier this month as they are powerless to do anything to change their system, the rug well and truly pulled from under their feet.

The idea that a Government can pass an Act of Parliament and reduce pensioners’ wealth will make many feel that nothing is certain any more. If it has the power to change indexation to CPI, what is to stop the Government changing to a new index that gives even lower increases than CPI?
One of the arguments trotted out in support of the switch is that CPI is more closely linked to pensioners’ experience of inflation because it excludes housing costs. I cannot see pensioners buying this one. Anyone who is retired is well aware that their disproportionate expenditure on heating and food has meant that their real rate of inflation has been nearly double RPI inflation in recent years.

Another argument I have heard from some actuaries defending the increase is that there is no guarantee that CPI will be lower than RPI. CPI was actually higher than RPI for all of 2009, they point out. So if this is not a cut in benefits being paid out, why are other actuaries saying that the move will save FTSE100 firms nearly £100bn?

The coalition may think it has got away with this switch from retail to consumer price index-ation relatively unscathed. This situation is reminiscent of Gordon Brown’s 10 per cent tax debacle. It was clear for all tax experts who read the 2007 pre-Budget report that it was going to clobber the low-paid but it was only six months later when the changes hit low earners’ pay packets that the political flak started to hit.

Similarly, the real test of public opinion will come when pensioners feel the cuts in their pockets in 2011. What’s more, this will become an annual story – as each year’s CPI figure for the year to September is calculated, so will the cumulative losses of millions of pensioners.

Pensioners are a powerful part of the electorate – they are far more likely to vote and they buy a lot of newspapers. George Osborne said in his Budget speech that the “triple lock” meant there will be no more 75p pension increases under the Tories. After this change in indexation, there are bound to be some for private pensions.

John Greenwood is editor of Corporate Adviser

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. I am no lover of the new coalition and regard Boy George’s cuts as a premature and reckless piece of political expediency to bring about structural changes to our society under the thinly veiled guise of economic necessity. However, even I choked on my coffee at the unbalanced tone of your attack on the switch to a CPI measure. The only thing we know for certain is that there will be a difference between the two measures, we cannot know until after the event whether this will make pensioners better or worse off. CPI is used for pretty much all other measures of inflation so it seems reasonable to extend its use to benefits.

    You state, correctly, that CPI excludes most housing costs but you neglect to say that it also excludes any pensioner families deriving 75% or more of their income from the State. I would suggest an inflation index that includes this constituent and excludes house depreciation is more likely to reflect the prices experience of the pensioners you maintain have been disadvantaged.

    This is an important issue that deserves proper critical analysis by opinion-formers if pensioners are not to suffer the sort of psychological trauma you allude to.

    To answer you rhetorical question – yes, an awful lot is safe for pensioners and we should be explaining this to them in a calm and rational manner.

  2. How can anything be safe when we have a system that allows retrospective legislation, normally every time a new government takes office? If a normal person is trying to save for their retirement in say 30 to 40 years time, what they actually get will depend on future governments and retrospective legislation among all the other variables. This in my mind is a gamble and deters me personally from having a pension. There is also the history of scandals to consider! It is hard to win.

  3. In the early years of my career when I was involved in defined benefit pension schemes, there was no requirement for either preserved pensions or those in payment to be increased by anything at all.

    Over the years we have seen a relentless succession of upgrades imposed by both Conservative and Labour governments on private sector schemes. Effectively, government has been saying to the private sector that in addition to funding gold plated Rolls Royce schemes for public sector workers, it has to do more or less the same for its own employees, with no consideration as to whether or not such a proposition is affordable.

    Even without these government-imposed upgrades, the cost of providing pensions has increased relentlessly. Now what we are seeing is more and more employers forced into the situation whereby what started out as the best scheme they could reasonably afford has become so costly that they been forced into abandoning it altogether. I have seen a letter from one employer to members of its final salary scheme which basically stated that the cost of maintaining its pension scheme had become so onerous as to threaten the very survival of the company itself. What kind of progress is that?

    In the best tradition of so many new regulations dictated by the FSA, despite all opinion to the contrary, the result has been more harm than good. Surely, a reasonably good and, above all else, sustainable Ford Mondeo scheme is better than a wound up Rolls Royce one?

    If a measure of relief for employers on the issue of increases to preserved pensions and those in payment slows the rate at which schemes are being wound up ~ often with a massive deficit as a result of government interference in how employers are required to manage long term the ongoing solvency of their scheme ~ then surely, overall, that has to be a positive move?

    In my opinion, this article appears to be based on a very narrow view of the issue at hand.

  4. To me it’s simple.
    I entered into a contract to pay nearly 12% of my salary into a pension fund with the pension payments being linked to final salary. I did that for more than 20 years.
    Along came Thatcher who broke that contract, and linked to RPI. (Isn’t that fraud).
    Now the con-dems decide to link to CPI, which is invariably lower than RPI.
    And you ask why I feel cheated. TWICE

  5. Theoc
    —-

    It is not really clear what you are talking about.

    Occupational final salary schemes are still linked to your final pensionable salary. Thatcher made no changes to this.

    When it comes to the basic state pension Thatcher did change the method of indexation from national average earnings to RPI. However the new coalition government is putting in place an increase rate which is the greater or:
    1) 2.5%; or
    2) CPI; or
    3) National Average earnings.

    So they have in fact restored the link to earnings. So i’m not clear on how you have been cheated twice.

  6. Not too difficult really.
    When I reired in 1994, my pension was worth 39% of my salary, Today it is 29% of the equivelant post current salary. That doesn’t sound like index linked to me.

  7. Public sector and State earnings related pensions are uprated under the Social Security Act 1975, which refers to changes in the general level of prices. It is up to the Government to decide the measure to use each autumn before laying an Order to give effect to any changes. CPI is no doubt being used this time because it is likely to save them money; it would not have done last year. If CPI turns out to be more expensive, I guess it will be ditched!

  8. Theoc | 23 Jul 2010 6:56 pm

    Not too difficult really.
    When I reired in 1994, my pension was worth 39% of my salary, Today it is 29% of the equivelant post current salary. That doesn’t sound like index linked to me.
    ————–

    No its still not clear. What is “my pension”? Are you talkign about (1) an occuaptional pensoin scheme or (2) the state pensoin or (3) both?

    If you are talking about the state pension then the uprating in line with earnings is being restored (unless CPI or 2.5% is higher). So how does that amount to being cheated twice?

  9. Jeff van der Eems 30th August 2010 at 6:39 pm

    John

    Found you!! Plesae please drop me a line.

    Jeff

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