RPI or R.I.P. British Pensioners?
A revolt was growing last night over a swingeing “stealth cut” in private pensions that could cost savers about £800 a year in retirement.
Up to 12 million members of final-salary pension schemes face up to 25 per cent lower incomes as a result.
Ministers insisted the switch in the way annual pension increases are calculated was a technical change that would have little impact on incomes.
But a backlash was spreading among pensioners, savers and experts yesterday, who said it was another covert raid on the savings of Middle Britain.
Dot Gibson, general secretary of the National Pensioners’ Convention pressure group, said the change would force more people to rely on state support, and accused ministers of lacking a “clear and coherent pension policy”.
She said: “Private and public sector workers are seeing their pensions under threat – yet they have paid into these schemes for years and have a right to expect back what they were promised.
“Pensions in this country remain among some of the worst in Europe and the Government doesn’t seem to have any idea how to improve the situation apart from making people work longer and giving them less.”
Dr Ros Altmann, a pensions expert and former Government adviser, said: “Ministers claim this is just a technical change, but it is going to have a negative impact on incomes.
“How much misery can pensioners have piled on them?”
And TUC general secretary Brendan Barber savaged the “stealth cut”. He said that over an entire retirement, “this will add up to a significant loss”.Whitehall sources dismissed the furore as “scaremongering”.
One claimed the most it is likely to cost pensioners is “a few pence a year”.
Liberal Democrat pensions minister Steve Webb slipped out the change in a Parliamentary written statement on Thursday. From next January increases in private pensions will be linked to the Consumer Price Index instead of the Retail Prices Index.
Both are measures of inflation but CPI figures are generally lower than the RPI’s because they do not include housing costs like mortgage payments.
Laith Khalaf, a pensions expert at Hargreaves Lansdown, calculated that if someone started drawing a pension at 60 and lived to be 80, they would receive 25 per cent less in all.
On current levels of RPI at 5.1 per cent and CPI at 3.4 per cent, the average occupational pension of £1,600 a year would be worth £4,043 after 20 years if uprated in line with RPI, but only £3,020 if uprated in line with CPI.
It means that pensioners would have lost out on £8,120 over 20 years.
Actuarial consultants Towers Watson calculated that by 2016 a pensioner now receiving £10,000 a year would be more than £800 a year worse off.
Accountants KPMG said the change could reduce UK private sector pension liabilities by 10 per cent, or about £100billion.
The move follows the decision in George Osborne’s emergency Budget last month to link annual benefit rises to CPI rather than RPI.
Some pensions experts believe the switch could save final-salary schemes from extinction.
Bob Bullivant, chief executive of Annuity Direct, said: “It will help their deficits.
“They will be more likely to be able to fulfill their liabilities and less likely to fail and fall on the Pension Protection Fund.”
Norma Cohen of the FT reports, Experts relieved on pension indexing:
A change to the way pension promises are protected against inflation is likely to be far less sweeping, and hit the savings of employees far less drastically than many retirement experts initially assumed, pensions experts said on Friday.
On Thursday, Steve Webb, pensions minister, said from next April, statutory rises to pensions being paid out and deferred benefits in occupational schemes would switch to moving in line with the Consumer Price Index, rather than the Retail Price Index.
The announcement prompted advisers to plug in their own numbers. Hargreaves Lansdown, the pension experts, estimated that, if the gap between the CPI and RPI remained at its current 1.7 per cent rate, 25 per cent would be wiped off retirement savings. According to KPMG, the effect would be to wipe about £100bn off the nation’s occupational liabilities, which stand at £1,000bn.
But on Friday the Department for Work and Pensions was at pains to explain the limits of its new rules. Most significantly, they do not affect most private sector occupational schemes, which offer inflation protection above the statutory minimum. They also apply only to benefits that accrue from next April; anything earned to date is protected.
Robin Simmons, partner at Sackers, a law practice specialising in pensions, noted that there were two key pieces of legislation that required employers to write inflation-proofing into their schemes. First was the 1993 Pensions Act, which required that deferred benefits – pension pots of former employees who were too young to retire – had to be increased in line with inflation.
Second, the 1995 Pensions Act required employers to raise pensions in payment in line with inflation up to a ceiling of 5 per cent.
But the catch, Mr Simmons said, was that the legislation did not specify the use of either RPI or CPI. Instead, it referred to “the general level of prices” – a level that successive secretaries of state have interpreted as RPI. Mr Webb did not even need to introduce legislation in order to make the change, he pointed out.
“If you are out there looking for a good austerity wheeze, this is it,” Mr Simmons said.
The act’s silence on the inflation benchmark probably has its roots in history. According to the Office for National Statistics, CPI was not introduced until 1996, after the ink on the relevant Pensions Act was dry. However, for purposes of backdating, the ONS does produce data based on the assumption that the CPI had existed earlier.
Moreover, the shift from RPI to CPI cannot apply to benefits already accrued. Section 67 of the 1995 act says employers cannot reduce accrued benefits without the permission of the scheme member. “There are a lot of schemes out there with more generous uplifts than the statutory minimum,” Mr Simmons said. “This stuff won’t change. I’d be gobsmacked if it did.”
Mr Simmons noted that the reason so many schemes had inflation proofing went back to the 1990s when companies were recording large surpluses. Employers wanted to take contributions holidays but boards of trustees could not allow the surplus to be used by them entirely. In the interest of fairness to employees, they often improved benefits, linking pensions in payment to inflation.
The CBI, the employers’ group, welcomed the change but acknowledged that it was not going to be the cost saver for the private sector that some had assumed. “The changes announced on Friday only apply to schemes indexed at the statutory minimum,” said Neil Carberry, CBI director of policy. He noted the majority of schemes offered better than minimum indexation.
Joanne Segars, chief executive at the National Association of Pension Funds, said the full implications of the changes had not yet been made clear. “The exact implication depends on what the individual scheme rules say,” she said.
Indeed, the exact implications remain to be determined but this technical switch will make future pensioners worse off because their pensions will be indexed to CPI, which not as comprehensive as the RPI in measuring inflation.
Let's say we get a deflationary episode, and CPI is falling but RPI is still rising. Pensioners will get screwed. Worse still, if all the quantitative easing sparks a major inflationary episode, then expect the gap between RPI and CPI to widen, and again pensioners will feel the pain.
Of course, the effects of these policy changes are typically exaggerated in the media, but what's truly amazing is how policymakers are trying to curb benefits by quietly cutting into pension savings. I guess they thought nobody would notice, but when austerity hits tight pocketbooks of retirees, they notice and are right to feel concerned. They didn't work hard all their lives to have some government bureaucrat conjure up sneaky ways to cut into their retirement savings.
And it's not just private pensions that are feeling the squeeze. Louisa Peacock of the Telegraph reports, Pension reform must be accepted by public sector unions and workers:
A report by the Public Sector Pensions Commission yesterday urged the Government to raise employee and employer contributions to pay for the size of public sector pensions liabilities, estimated by independent actuaries to be £1.2 trillion – far higher than the Government’s £770bn figure.
Other proposals include increasing the retirement age from 60 to 65, closing the scheme to future accrual, and more radical plans such as switching to career-average or hybrid schemes.
“In its current form, workers must accept the final salary scheme is no longer affordable. Closing it to future accrual, or creating a hybrid or career-average scheme, are all serious considerations. Without changes, in the current economic climate, the squeeze on budgets will inevitably lead to service cuts or job cuts, and that shouldn’t happen. We need pensions reform.”
The recommendations by the Commission, made up of experts from leading bodies including the Institute of Directors and Institute of Economic Affairs, come ahead of the Coalition’s newly created pension reform body, chaired by former Labour minister John Hutton and due to report in October.
Unions, already reeling from cuts to redundancy pay which were announced on Tuesday, immediately warned they would fight changes to public sector pay, jobs and pensions.
Mark Serwotka, general secretary at PCS, said: “The coalition Government has wasted no time in setting about dismantling the public sector piece by piece, so we’re wasting no time in planning how to fight back. We have always said we are willing to negotiate and reach agreement, but when jobs, pay, pensions and now civil servants’ contracts are under attack, we will have to plan for industrial, political and community campaigns on a scale not seen for decades.”
Ms Hibberd pointed out that local government workers had already accepted changes to their pensions, with contributions rising from 6pc to 7.5pc two years ago. However, the scheme is unfunded, which means it is paid for out of the employer’s current income, putting less burden on the taxpayer, she said. For organisations offering funded schemes, including the NHS, teachers and the civil service, unions had to accept the need for pensions reform to save jobs, she added.
Charles Cotton, pensions adviser at the Chartered Institute of Personnel and Development, agreed radical reform over state workers’ pensions was justifiable.
Employers needed to think radically about how they rewarded their employees, he added, as it was unlikely that pensions alone attracted the best staff. “The way that public sector workers are currently rewarded and recognised needs to change. Employers could give staff an additional sum of money that they could then spend on the benefits that best meet their needs and wants, which could include a contribution to a pension scheme,” he said.
Other employers’ groups, including the CBI, raised fresh concerns that the private sector should not have to pick up the slack for the public sector pensions shortfall.
But beyond that, the G-20 needs to take action on pensions. It's not just about reforms and cuts. They need to sit down and figure out how they will tackle the global retirement crisis and make sure they'll provide pensioners a safety net which is properly funded, well administered and will never be jeopardized every time a financial crisis erupts on Wall Street.