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Suspicious minds

Suspicions will intensify as the coalition’s austerity measures roll out.

The contrasting responses of the French and British public to changes in their pension entitlements reveal more than the two countries’ different traditions of political demonstration.

The scale of the French response, which has seen up to 3.5 million demonstrators bringing their country to a standstill over a plan to raise state pension age from 60 to 62, seems inconceivable to us. When our former secretary of state for work and pensions John Hutton put state pension age up by three years to 68 back in 2006, the public barely raised an eyebrow.

That contrast cannot be entirely down to France’s culture of public demonstration. It also reflects the different sense of trust and entitlement towards the state pension that prevails in the two countries.

In France, people believe in the state pension. They have to because most people rely on the state pension for the majority of their retirement income.

Our far greater reliance on company and private pensions makes us far less interested in and suspicious of what the state has to offer. We do not expect much and we are not surprised if it is taken away. And as successive waves of austerity measures crash into the pension system, that suspicion of all things state-run can only increase.

Take the switch from RPI to CPI for indexation of Serps and state second pension, which has barely earned a column inch in the national press.

The recently published inflation figures for September mean S2P benefits will be uprated by CPI of 3.1 per cent and not the 4.6 per cent increase recorded for RPI in the previous 12 months. That means S2P benefits are already 1.5 per cent down and, taking the longer view, the July Budget projected the change to CPI would lead to increases of 13.7 per cent over the next six years rather than 22.1 per cent under RPI.

As an overall package, the indexation changes for basic and state second pension are a net expense for the Government but the complexity of our system means generosity in some quarters can be paid for by parsimony in other less transparent areas. For some high earners retiring now, combined Serps and state second pension will exceed the basic state pension, yet this greater part of their state pension will get weaker inflation protection.

Many who have built up S2P entitlements could be forgiven for thinking those benefits, indexed at RPI, were theirs to keep. Not so. The reality is, of course, that the system is so complicated that virtually nobody knew what they were entitled to anyway, which is another reason why the Government can get away with what it wants as long as it keeps the winter fuel allowance and increases basic state pension by more than 75p.

If watering down indexation from RPI to CPI means lower S2P, then the switch also goes some way to fulfilling the prophecies of those who decided to contract out of S2P on the basis that they did not trust the Government.

While many of those who contracted out are worse off in monetary terms on account of having done so then if future S2P benefits are watered down, the extent to which this is the case is surely reduced.

These questions of trust and suspicion are likely to intensify as the austerity measures are rolled out, becoming an increasingly significant factor in individuals’ decisions whether to take pension offshore and whether to transfer out of DB schemes.

Anyone faced with a closing door is bound to feel twitchy and the planned ban on transfers out of contracted-out defined-benefit schemes from 2012 will fuel feelings of suspicion, creating an unnecessary pressure for people who would be better off staying put to consider moving.

John Greenwood is editor of Corporate Adviser

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