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