Private and public debt

I’m catching up late with this, but this is indeed an excellent post (and, indeed, blog) on the Office for Budgetary Responsibility’s revision of its forecasts on what is going to happen to private debt over the next few years. As public debt is being reduced, private debt is now likely to expand.

Inevitably, government cuts to public services will lead to people paying for them separately, thus squeezing household finances further and driving up household debt; while an economy actively flirting with depression will cause further problems to household debts as people lose their jobs, on top of the impact of the falling value of real incomes, as people seek to maintain living standards as far as possible. That’s not rocket science – except, it would seem, to a government intent on blazing a path back to the 80s.

This may well spell bad news for the 2012 pensions reforms: rising private debt, on top of household savings apparently resuming pre-recession trends, is likely to cause further pressures on peoples’ ability to save (more) for their retirement. At the same time, rising debt is likely to increase pressures for people to have access to their pension pots early. This has already been the subject of a Treasury consultation. Evidently, pensions are not savings per se – rainy days are what savings are for; pensions are for your retirement – but seeking to encourage people to save more while engaging in policies that are driving up their debts is an unhealthy and short-sighted combination.

At the wider, political level, we may well here be sowing the seeds of a future financial crash – but it is clear that the intentional driving up of private debt, despite the lessons of what the economy has been through in the past few years, itself underlines the sharply ideological nature of this government’s intensifying onslaught.

[Edit 1 April: And for living proof that, if you sit an infinite number of bloggers down in front of an infinite number of keyboards, you will get, if not the works of Shakespeare then more or less similar posts, within almost literally seconds of posting this, I discovered that Duncan Weldon over at False Economy had made most of the same points, and better, and with more links, too. Damn!]

CPI indexation: a saving or a cut?

A couple of days after Liberal Conspiracy disclosed the – denied – revelation that BBC journalists are being instructed to use ‘savings’ rather than ‘cuts’ in their coverage of government announcements, it came as something of a surprise that call me Dave spoke to his party conference promising ‘less debt, more saving’: it seems to me that less debt, more cuts is exactly what the ConDems are all about.

But – taking the promise at face value – if we can look forward to a government that seeks to encourage saving, then perhaps we can look forward to this government, after all, turning away from the proposed switch to indexation of pensions in payment by the Consumer Price Index rather than the Retail Price Index. The sleight of hand switch to a lower value indexation for future pensions increases in defined benefit schemes announced last July is no less than a government-inspired theft of workers’ occupational pensions. It will rob pensioners of thousands of pounds, with the loss rising with every year of retirement, leaving them more dependent on means-tested state benefits and taking crucial spending power out of the economy. And if the government can do that, to those who are pensioners already as well as to future ones, and in the face of pensioners’ expectations as to what they have been paying into all their working lives and frequently in spite of private scheme-based agreements on how indexation will be dealt with, why should they bother with a pension?

A DWP consultation on this issue as regards private sector occupational schemes closed last week: if the government is serious about encouraging more saving, it will have the courage to do away with this proposal and respect pensioners’ continuing rights to a pension indexed in line with RPI.

CPI and fear over the rising cost of living

Today saw the coincident publication of the DWP consultation on extending the move to the Consumer Price Index to private sector occupational schemes, following the government’s announcement in July that it would be doing so for benefits and public sector pension schemes, and for related private sector schemes, as well as some research from insurance company Aviva demonstrating that the over-55s are increasingly fearful of the rising cost of living.

The move to CPI indexation remains unwanted, nasty and mean spirited, and this is in no way ameliorated by the DWP’s otherwise welcome recommendation in today’s consultation not to move to enforce the switch on all private sector schemes via over-riding legislation. Having seen the move elsewhere, private sector schemes may already be considering such a move, so the absence of legislative compulsion is small compensation for the compulsion of circumstances. With CPI being in the long-run lower than RPI by about 0.75% per year, the move will cost pensioners on even moderate pensions as much as £25,000 during their time in retirement. In the public sector, and concerning those on benefits, the switch essentially makes pensioners pay for the excesses of the bankers which have been so costly to the economy while, in the private sector, giving windfall gains to companies which are also directly affected by the move.

The move was predicated on the basis that the Retail Price Index is not a suitable measure of inflation for pensioners because it includes housing costs and, apparently, 70% of pensioners don’t have mortgages. Well, that implies that 30% do – and that’s a number that’s only likely to grow in the future – while other aspects of housing costs, such as council tax and rent, are also excluded from the CPI. Housing costs actually form a large part of pensioners’ expenditure: the most recent ONS Pensions Trends publication estimates that 17% of the expenditure of households headed by someone aged 65-74 is on housing, while the Aviva study also quotes a figure of 18% (with housing actually taking the largest share of the expenditure of the over-55s). The Royal Statistical Society has called for a review of the measurement of inflation, sparked off not least by the increasing prominence of CPI ‘even though it is not necessarily the best index for all purposes.’ And we know that pensioner inflation is anyway higher than RPI, as a result of typical pensioner expenditure being focused on the more high-rising items.

In the context of the prospect of extensively lower indexation applied to pensions in the immediate future, it is no wonder that pensioners are becoming more and more worried about the cost of living: three-quarters, according to the Aviva study, say that the cost of living was their biggest fear over the next six months while 70% say that it is their biggest fear over the next five years – a rise in the latter case of no fewer than 52 percentage points since May 2010. You could ask for no clearer view about the impact of the coalition government on pensioners than that.

Thankfully, the Office for National Statistics is considering how housing costs can be brought into RPI (para 9.10), while the UK Statistics Authority has this week published a programme of work for ONS which includes the accomplishment of such a move within two years. If the government doesn’t interfere, this will row back some of the difference between RPI and CPI, thus taking some of the sting out of the move, although the bulk of the difference (arising from the different mathematical construction of the CPI) will remain. Pensioners are right to be fearful of their future under the ConDems – it will be one in which they are very much worse off.

Silver RPI demonstrates truth of switch to CPI

The charity Age UK has produced the ‘Silver RPI’, its assessment of the levels of inflation faced by older people.

Now I seem to remember that Steve Webb, Pensions Minister, argued back in July that the switch to the Consumer Price Index for the uprating of pension benefits was because the CPI was ‘a more appropriate measure of pension recipients’ inflation experiences‘ than RPI. In contrast, Age UK’s work demonstrates that not only is CPI a less relevant measure of inflation than RPI as regards older people, but that even RPI (which historically is about 0.75 percentage points higher than RPI, with the gap likely to be higher in the next five years) actually under-estimates the level of inflation experienced by the over-55s. Indeed, the experience of inflation rises with age: since the start of 2008, RPI has under-stated the level of price rises for the 55-59 age group by 1.8%; and by 4.1% for the over 75s.

The difference results from the effects of the fall in mortgage costs masking the effects of price rises elsewhere, with older people carrying less mortgage debt and, therefore, with expenditure patterns which are less influenced by mortgage costs, while older people are typically more exposed to rises in utility costs since a greater proportion of their expenditure goes on heating and lighting.

The difference to RPI for the ‘true’ rate of inflation for older people is costly and, therefore, the gap between CPI and the silver RPI will be even more so given how much CPI undercuts existing RPI.

If RPI is not an appropriate measure of inflation for older people – which clearly it is not – then Age UK’s work demonstrates just how much the switch to CPI was dictated not by a desire for greater stability, accuracy or any other such superficially ‘noble’ reason but by the simple desire to save money, and from a vulnerable group of people perhaps less able to mount a strong voice in opposition to it. A simply shameful exercise from a government with a bankrupt morality.

The universal citizen’s pension

Pensions Minister Steve Webb’s plans for a universal citizen’s pension of £140 per week – first broken on Citywire last Friday and confirmed on Monday with a DWP Green Paper due before the end of the year – is an attractive-looking option but, as always, the devil is in the detail.

Nigel at ToUChstone points out that the issues of the cost of the scheme and who pays for it, and unravelling the contracting out aspects (and see also Bryn Davies’s comments on the impact on contracted out pension schemes), present immense practical difficulties while the costs are likely to be well in excess of the suggested savings from abolishing the means testing elements; meanwhile, further leaks about the proposals (that the measure will not be introduced until 2015, by which time the state pension plus means-tested Pension Credit will be well above £140; and that, even then, it will be for new pensioners only) indicate that the gritty reality is likely to fall rather short of the ambitious glory of the headlines.

None of this means that the concept of a citizen’s pension is not worth looking at, while pensions tend to be considered within a long-term time-frame, so a gentle introduction is not completely incredible (though neither did that prevent Beveridge from radical, and rapid, reform to improve state pension provision, and at a time of course when the debt situation was *even* worse). The sheer complexity of the UK’s pensions system also implies a web of difficulties whenever reforms are attempted (and, in this context, today’s announcement of the outcomes of DWP’s review of automatic enrolment appears to be worth at least two cheers).

Even so, a new system with older pensioners on one regime and new ones on another does stretch the bounds of credibility, not least within a system whose essential characteristic is a striving for greater fairness. If greater fairness is not the outcome, any reform looks surely set to fail and, at least this side of the publication of the Green Paper, I can’t see any circumstances in which this reform might, at least under the current government with its, er, obsession with cuts, succeed.

Pension fees and management charges

Tonight’s Panorama focused on pension charges. The point needs to be made that pension fees and annual management charges can eat heavily into the pension pot and that even tenths of percentages can make major differences either way to the annual pension earned from defined contribution schemes. Indeed, David Pitt-Watson has made this point excellently for the RSA and also for Unions 21.

However, I’m not sure that the populist style of reporting here is at all helpful. A simple comparison of the total lifetime charges of a pension fund and the contributions invested ignores the amount of investment returns and, while growth over the last ten years has been low, a person now retiring who started their fund 40 years ago would simply not be in this position. To ignore investment growth of funds in the interim is frankly alarmist, even where the sizes of the fees involved is quite shockingly large and inexplicable in terms of the costs of the activity involved in securing that growth (or, better said, the opportunity for that growth). The situation facing people with defined contribution schemes is difficult enough without causing further panic, and this is the reverse of what we need when it remains true that the state is becoming increasingly reliant on people taking sensible, mature decisions over saving for their retirement.

What we do need, in contrast, is a clear education campaign on the relative costs and implications of changes and AMCs, and we do need to cut through the lack of expertise which makes pensions investment decisions so frightening as to induce sclerosis. Markets don’t thrive on lack of information and opaque structures – though bad practices and profiteering certainly do. The case for regulation here is pretty strong – and, in this direction, Panorama has shone a useful light.

Pensions: going down a bomb in the boardroom

A belated welcome to last week’s publication of the TUC’s annual PensionsWatch survey.

This is a really useful reminder of the true nature of the pensions divide in the UK – not between public sector and private sector, but between the pensions of senior executives and everyone else. Among the findings of the 2010 survey, we find that the value of the average executive pension pot has increased by 11.7%, to £3.8m – a sum that would deliver an annual pension of over a quarter of a million, some 26 times the average occupational pension in payment. Over half of all directors in the survey are in defined benefit schemes (a percentage coverage reached among employees in general in 1983, since which time it has fallen back to less than one-third), even though many such directors retain such provision despite having closed it for many of their staff. And the average contribution into an executive’s defined contribution scheme was 19% – three times the average for shopfloor workers. For executives not in a scheme, the average cash payment was £120,000.

As Brendan Barber pointed out, directors have been in the vanguard of attacking pensions provision in the UK, via its so-called ‘independent‘ pensions commission with the Institute for Economic Affairs, while a more fair and reasonable approach would be one based not just on greater transparency of executive pension arrangements but a common scheme for all in the organisation. Not least since taxpayer support for executive pensions is so huge. The point is not lost on Joanne Segars, of the National Association of Pension Funds, which has ‘real concerns‘ about the issue on the grounds of fairness. Real change, however, is likely to require a somewhat stronger intervention.

On top of today’s research showing that executive bonuses are back to pre-recession levels, the notion that it’s business as usual in the boardroom, regardless of what is going on elsewhere in the economy, is one that increasingly seems to define our modern age.