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Morning Line: Steve Webb, this is no way to handle pension changes

The government's switch of pension indexation to the consumer price index from the retail price index takes on a whole new and outrageous meaning now it is being applied to the private sector.

Morning Line: Steve Webb, this is no way to handle pension changes

The government's switch of pension indexation to the consumer price index from the retail price index takes on a whole new and outrageous meaning now it is being applied to the private sector.

Once again we have a government measure shattering confidence in the idea of saving into a pension. Pensioners and workers will rightly feel they are having the carpet swept from under them as the level of income they can expect in retirement will now fall by following a different measure of inflation.

As with all things connected to pensions – like Gordon Brown’s dividend tax raid on pensions in 1997 – the impact of this switch will only be felt by people over the longer term. Initially the impact on pension incomes from CPI indexation will be small but will gather force as the years go by. After a lengthy retirement individuals could be receiving a pension that is up to 25% lower than it would have been under the link to RPI.

We really expected better from pensions minister Steve Webb, a Lib Dem MP who has established a reputation as someone who understands the need for genuine and effective reform in this dizzyingly complex area.

Sneaky announcement

Why was this measure not included in the emergency Budget last month given it is obviously part of moves to cut the pensions burden on the economy? Why was it snuck out in the form of a ministerial answer to a Parliamentary question as if it was an afterthought when it affects millions of people? The Department for Work and Pensions denies this was a stealth announcement, saying it was released in the normal business channels. But I find it disappointing. No wonder the BBC, Daily TelegraphFT and Guardian are reacting negatively.

It is striking that we did not get an outcry when chancellor George Osborne announced that welfare benefits and public sector pensions would in future drop RPI and rise in line with the CPI measure of inflation. The complaints mainly came from the unions with Brendan Barber, TUC general secretary, saying recently: ‘Changing just one letter from R to C’ shaves a little off pension increases most years but soon mounts up to reduce an average public sector pension of £5,500 to £4,845 over 20 years.

Don't ignore high pensioner inflation

If this switch did not get the attention it deserved it was because it was part of a busy Budget. It also formed part of the government’s justified attempts to curb spending and scale back the state’s mounting liabilities to public sector pensions (£1 trillion and counting).

But now we see it being applied to occupational schemes it takes on a different light. Webb’s claim that ‘CPI provides a more appropriate measure of pension recipients’ inflation experiences’ rings hollow in the face of study after study showing the rate of inflation experienced by pensioners is far higher than the rest of the population.

As Help the Aged pointed out when RPI fell below zero last year, single pensioners at the time were experiencing inflation of 6.8% and pensioner couples inflation of 5.2% as a result of rising fuel, food and care costs.

Because CPI excludes house prices and mortgage payments it has been consistently lower than RPI (around 0.5% a year on average), so we can expect this disparity to worsen. Experts at Towers Watson say pensions would be uprated next year by 2.7% under CPI, 1% less than under RPI.

It is very well for the coalition to look for ways it can cut costs for government and business, but to deny the reality of inflation that is staring millions of retired people in the face is morally wrong - and electorally dangerous. 

One law for them ...

Yesterday’s announcement does not mean that all private sector final salary schemes will immediately switch to CPI indexation. Whether they do is up to the trustees looking after the scheme on behalf of its members. Trustees can resist such a move but as the reaction from the CBI makes clear they will come under pressure from employers looking to cut their costs. If trustees refuse to help, companies could threaten to cut their contributions on behalf of employees.

If the switch to CPI keeps open final salary schemes that would otherwise close, I guess it can be justified. But how many employers salivating at this prospect took contribution ‘holidays’ during the stock market boom of the 1980s and 90s I wonder? Once again it feels like retired and working people are always at the wrong end of pension changes.

21 comments so far. Why not have your say?

Chris Armstrong

Jul 09, 2010 at 12:11

Boloney! And I write as a member of a final salary scheme who is already drawing poension. The degree of hubris is some press reports is absurd. Headline figures like 25% do nnot help rational debate. CPI is a more realistic factor for pensioners because it excludes mortgage costs. There is no guarantee that RPI will always be higher, and the purpose of indexation is to leave the pensioner in the same position, not a better one.

It's a great shame that supposedly responsible people whip up anger about this

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Gerald Cadogan

Jul 09, 2010 at 12:23

i seriously wonder what sort of pension Chris Armstrong is drawing - it must be very different from mine. it is a fact that pensioner inflation is far higher than for other people - pensionsers spend proportionately more of their income on council tax, electricity, gas, water, transport, property maintenance etc than do others and all these things have been inflating through the roof and will continue to do so - hasn't Chris seen what's supposed to happen to fuel prices, again, this winter - does he seriously believe Councils are suddently going to stop increasing their taxes - pensioners don't buy tons of electronic goods, waste their money on ipods, itablets, mobile phone charges etc (all of which are coming down) - they 'waste' their money on trying to live reasonably and inflation hits them hard. My pension pays a proportion of RPI up to a (low) maximum percentage - it does not guarantee me inflation proofing without limits like the public sector gets, so now I'll get a proportion of something smaller - great deal! And as the author says its not what I was promised, its not what I saved for and it wasn't me that was able to take the pensions contribution holiday for many years - it was that poor company I worked for because the government told it to - and now I'm supposed to pay for all the politicians poor thinking!

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Kevin Neil

Jul 09, 2010 at 12:23

Sensationalist reporting like this does nothing to help the debate about pension provision.

Your penultimate paragraph confirms that "the announcement does not mean that all private sector final salary schemes will immediately switch to CPI indexation", so it will obviously be a while before we know the true extent of this change.

Also, you say that with CPI 1% less the RPI it will mean a real cut in future benefits. Well, not in all cases. You seem to be forgetting that the last Labour government allowed schemes to restrict increases to RPI or 2.5% if lower for benefits accrued from 2005 onwards; so if a scheme has already adopted this measure then it does not matter if CPI is 2.7% and RPI is 3.7% (or even 5.1%), those members will see their benefits increase by only 2.5% anyway.

Let's not also forget that the GMP portion of final salary benefits have had numerous reductions in the rate of revaluation from the level of 8.5% per annum set when I first started dealing with pensions over 20 years ago.

But hey, let's not allow these facts to get in the way of a good headline eh?

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Jul 09, 2010 at 12:35

All three comments above have some validity. However, it does seem outrageous that the Government can change the terms of implicit contracts between private citizens and private sector pension schemes. This does put this announcement in the same category as Gordon Brown's raid on tax credits.

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Anonymous 1 needed this 'off the record'

Jul 09, 2010 at 12:43

Following many redundancies in the 80s and 90s I still have a mortgage as it has been impossible to pay it off. Currently, with interest rates and inflation low it is manageable. However if inflation takes off and interest rates follow, my newly revised CPI pensions will not reflect this. It looks as though Im going to have to down size-again. This means moving to another part of the country. I wonder how many pensioners will find themselves in this position? or even realise whats going on?

I do enjoy a Tory Govt; they always look after the elderly and vulnerable!!!

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Anonymous 2 needed this 'off the record'

Jul 09, 2010 at 13:02

So its suddenly become outrageous 'now it is being applied to the private sector'

Nice piece of unbiased, even handed journalism Mr Lumsden.......

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Andrew Stevenson

Jul 09, 2010 at 13:03

'But how many employers salivating at this prospect took contribution ‘holidays’ during the stock market boom of the 1980s and 90s I wonder?' - Many firms took contribution holidays for the simple reason that the great believer in 'Tory' values Kenneth Clarke told companies that if they ran a surplus in their pension funds of more than 3% he would tax it. The fact that the values of those funds depended on stock market values (which as we know only too well can go down as well as up) didn't bother him.

It was also the great Kenneth Clarke who started making pension funds pay tax on the dividends earned on shares. Of course it was Gordon Brown who thought that was a wonderful idea and finished the job. Those two measures coupled with people living too long and the poor performance of the funds are what have wrecked the final salary pension schemes. It is thanks to politicians and all their endless idiocy (can anybody think of a single subject that politicians have not made a complete mess of?) that we are where we are today.... bon voyage

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Philip Parkin

Jul 09, 2010 at 13:04

Remember it was a Labour government who on this years Pension indexing only applied it to the basic state pension, those pensioners on the second state pension were robbed once again.

Nothing really changes.

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Jul 09, 2010 at 13:09

Most illustrations focus on the impact on final year's pension payment after a run of twenty-years or so. Much more revealing is the cumulative "shortfall".

My principal occupational pension will start at a modest £22K when I reach 65. Should I get to 85, the gap between CPI and RPI inflation-proofing will be around £5,000 a year, but the sum of shortfalls generated over 20 years will be close to £50,000. So after an average length retirement on a modest pension, I'll be £50,000 down on my savings. And the Pension provider will be £50,000 better off.

I reckon £50,00 a non-trivial hole in my planning for the expenses extreme old age brings with it. But why worry? I'm sure the tax-payer will come to my rescue with top-up payments and other funding for home-care etc: providing a back-door subsidy to the banks and city-run pension funds.

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Anonymous 3 needed this 'off the record'

Jul 09, 2010 at 13:53

I did not notice anyone complaining about it being applied to the public sector a couple of weeks ago - now it s a big issue - typical private sector double standards.

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David Meyer

Jul 09, 2010 at 13:59

How many private sector employers are currently offering their staff pension indexation above the present limited price indexation threshold of 2.5% p.a.?

I think that the change to CPI indexation will have minimal effect.

Another example of journalistic hysteria.

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Anonymous 4 needed this 'off the record'

Jul 09, 2010 at 14:43

Well, I have drawn this tio the attention of all my fellow retireees I know suggesting they contact their MPs. Surely the point here is that this appears to be applied retrostpectively: That cannot be right! All my sums and estimates have been done one way and, bang, with the stroke of a pen some government minister seeks to alter things in a way that I cannnot make provsion for now.

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Jul 09, 2010 at 15:05

The private sector has been mugged by the Government on several occasions but somehow not one comment has mentioned the pension aparthied in the private sector. People in private sector pension schemes have been hoodwicked by their bosses into looking the other way.

The real changes in private sector pensions has been the retreat by employers (ie directors) from providing not just decent pensions but any pension at all. Most get nothing.

But surprise, surprise top directors (FTSE100) do very well, thank you very much, even during the recession. Between 2007 and 2009:

•The average transfer value of a FTSE 100 Director pensions went from£3 million to £3.4 million.

•The rise in transfer values for those with the biggest pension entitlements at each company was from £5.3 million in 2007 to £5.6 million.

•The average accrued pension went up by 28 per cent from £193,000 p.a. to £247,785 p.a

•The average accrued entitlement for the director with the highest pension in each company went up by 32 per cent from £320,000 £421,326 p.a.

•For those with DC schemes the average contribution went up by 69 per cent from £86,000 to £145,220

•The average received by those with the highest contribution in each company was £147,000 in 2007, rising to £179,540 in 2009, a rise of 22%.

•The majority of directors in both 2007 and 2009 had a pension age of 60.

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Chartered Accountant

Jul 09, 2010 at 15:17

I sometimes wonder whether correspondents like Gavin Lumsden have any real knowledge of the subjects on which they write - otherwise they wouldn't come up with absurdities like "Once again we have a Government measure shattering confidence in the idea of saving into a pension". If people are members of a Company Final Salary (Defined Benefit) pension scheme, that is because they are lucky enough to work for an employer who despite all of the problems heaped on their heads by politicians, still offer this as a benefit. If you are in such a scheme, your confidence cannot be shattered by any legislative change. You are in it because you chose not to opt out of it because the alternative is to be in a Money Purchase (Defined Contribution) Scheme wherein the individual member bears most of the administration costs and all of the investment risk. When you opt in, you accept from the start that the end result may vary from projections but it is still a better deal than Money Purchase. I am a retired member of a Final Salary scheme run by a household name multinational and this year we received no pension uplift whatsoever which bears out some of the comments above that whether CPI or RPI is used, the annual uplift may reflect neither.

However, if I may return to Gavin Lumsden's idiotic comment about "shattered confidence", the only people whose confidence needs boosting to save into pension schemes are by definition those who may opt to contribute or not to contribute and such people will all be in Money Purchase schemes which are unaffected by this legislative change. Please do your homework Mr Lumsden rather than write emotive rubbish.

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Anonymous 5 needed this 'off the record'

Jul 09, 2010 at 15:52

I think that there is a direct correlation between how poorly misconcieved and outrageous the Citywire commentators are and the amount of debate that is generated. This must be Citywire policy. The worse they are - the more numerous (and worse) the responses are.

Even though we are in a parlous state as a nation the majority are still out for number 1 and jealous of any situation that may have left someone else better off

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Anonymous 6 needed this 'off the record'

Jul 09, 2010 at 16:43

With the exception of the 1st contributor who dwells on another planet , there hae been some interesting views and facts. Of course they, once again. represent all shades of opinion but missing the essential reason for the change envisaged for next year.

Everyone, without exception concentrated on the effects in great detail but whilst these are irrefutable facts lets look at the reasons behind the proposal.

!/ It is a done deal and no amount of irritation wil change it.

The effect will be felt by all pensioners and not just private pensioners. The telling observation from the Minister that shows the proposal is flawed is the disengenous remark that most pensioners come across CPI inflation rather than RPI inflation.

We all know that neither figures reflect reality and both statistics were abused by the previous government for their own ends and likewise this government.

The fact is also that it is not only the employed that have mortgages.

So why this proposal at all.

Plainly it is because this lot need to reduce the deficit. How this is done is the most important thing.

It is first of all easy to manipulate those that can't hit back and not everyone thinks so longterm.

A further result of this proposal should be also be considered. It is not only that this lot need not increase pensions by so much each year but that the pension funds will also have their " black hole " reduced at a stroke. This leaves the providers better able to use the benifits for commercial ends ( this includes Divi's. of course ).

ONLY PENSIONERS SUFFER CPI in only comparative to RPI in this present economic bind.

Wait until a year or two up the line and you will feel the difference and, belatedly, voices will be raised.


As for governments not involving themselves with privat pensions let me tell you that :-

The previous lot interfeared with them in the last budget ( but always for following years effects ).

As from April 2010 National pensioners cannot take a pension before 55yrs.

This now includes members of private pensions. So those who signed to receive it at 50yrs must wait too.

This, as an earlier contributor stated, is a contract between a company and an individual and is an affront.

This could be repeeled, so why not write to your MP about this too.

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Stephen M

Jul 09, 2010 at 16:53

Just another reason to avoid the pensions scam!!

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Tim Middleton

Jul 09, 2010 at 20:35

A number of commentators have assumed that this change can be applied retrospectively to benefits that have been accrued to date; this would be illegal under Section 67 of PA95. The statutory minimum increases applicable to private sector Defined Benefit pensions in payment are determined by the type of benefit concerned and when it was accrued. This is horrible stuff, but please bear with me.

Think of the pension as a sausage. In payment, different slices will be subject to different to different rates of statutory minimum increases depending on when the benefit accrued. Remeber too that trustees are free to grant increases in excess of the statutory minimum should they wish.

Guaranteed Minimum Pension (GMP) benefits are subject to two rates of increase. GMPs accrued before 1988 receive no increases in payment from the scheme, but a full RPI link is maintained by additional increases made to state benefits. Post 88 GMPs receive an annual increase from the scheme of the lower of 3% and RPI; if RPI is in excess of 3%, a top-up is made to state benefits. Benefits in excess of GMPs accrued to 5 April 1997 are not subject to any statutory increase at all.

All benefits accrued since 1997 are subject in payment to Limited Price Indexation (LPI) increases. To 2005, this was the minimum of RPI or 5%. Since 2005, LPI has been the minimum of 2.5% and RPI. This latest change makes LPI the lower of CPI and 2.5%.

Pensions Administration is, as you can imagine, horribly complicated.

Please remember that changes cannot be applied retrospectively and trustees may make increases in excess of the statutory minimum.

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John F

Jul 10, 2010 at 15:07

I wonder which group of people's gold plated pensions will be exempt from these changes then?!

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Andy Mann

Jul 10, 2010 at 18:48

Private Occupation Pension Schemes provide 'deferred remuneration' to ex-employees in accordance with legally binding written terms and conditions. The payments are made from employer managed funds. The government does not pay the pensions or incur any liability in respect of them. Why then, should the government have the power to impose arbitrary changes

to these contracts that would benefit employers to the tune of an estimated £100 billion pounds?

If a pension scheme explicitly references the 1993 Pension Scheme Act revaluations with regard to deferred pension indexing or the Pension Scheme Act 1995 for pension-in-payment increases or uses words such as 'government announced inflation' in connection with increases then these would likely fall within the scope of a future government decision to use CPI-linked rather than RPI-linked figures.

A proposal, howevere, to override the existing legal terms and conditions of employees' private pensions schemes by either ministerial decree or legislation is unfair, especially on people who are already drawing their pensions and more generally, in principle, legally binding terms and conditions contained in pension schemes and contracts between private parties should not be overridden by subsequent legislation unless the contract itself is fraudulent or illegal. Retroactively applicable legislation that overrides legally binding contracts is unsound in principle and should be vetoed in parliament and vigourously litigated in the courts.

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The Astrologer

Jul 13, 2010 at 19:58

Why so much concern about this proposal? Trustees are only required by law to index up to 2.5% for post 2005 accrued benefits. House prices are in the short to medium term going to fall. Whilst mortgage interest rates may rise, I would like to know just how these two factors are built into RPI. I suspect that CPI may be a better for many years than the politicians intend.

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