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.

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.

BBC pensions

Much talk about yesterday’s BBC proposals to cut the deficit in the BBC pension scheme by addressing the scheme’s benefits structure, including not least to redefine the annual growth in final pensionable pay from 1 December next by a maximum of 1%. The BBC is not a public service organisation, in terms of the terms and conditions of employment, and it is not covered by the Hutton Commission review but its presence in public life means that the review itself provides part of the essential backdrop. As BBC blogger Robert Peston commented – from the perspective of a member of the scheme – this creates a huge differential between members of the scheme, whose final salaries are rising by no more than 1%, and former members, whose salaries are fully inflation protected. This creates a major disincentive to remain a member of the scheme – which, as Peston comments, might well be the aim.

It’s not quite as simple as that: at a time of very low inflation, each additional year’s membership of a final salary scheme, coupled with some level of growth in final salary, is likely to mean people are better off remaining in a final salary scheme. Of course, we don’t know what’s likely to happen to inflation (and you can’t tend to switch into and out of a final salary scheme), though this may be an important consideration if the ConDems budget cuts do indeed merrily lead us ‘unavoidably’ into a double-dip recession over the next few years, especially for workers coming up to retirement. At the same time, the so-called ‘fringe’ benefits of final salary scheme membership – such as ill-health retirement and death in service benefits – are likely to prove an additional attraction to remaining in a scheme.

It needs to be borne in mind that the BBC proposals are just that: subject to consultation, and they may well change, not least as a result of discussion with employees as represented through the BBC’s trade unions.

However, the level of attack represented by such moves is significant. Inflation as measured by the Retail Price Index has, over the past, ohh, forty years between 1970 and 2009, grown by an annual average of 6.47% although that includes some periods of high inflation in the 1970s and 1980s; the more recent history over the last twenty years shows annual inflation standing at 2.81% (figures from measuringworth.com). This is clearly a sizable comparative loss, not least since annual wages tend to rise faster than inflation (the BBC scheme, for instance, seems to use a real growth in wages of +2% in its actuarial assumptions).

Any switch to CPI rather than RPI for indexation of benefits – which may well cover some private schemes which draw on old definitions of inflation – will have a further impact on lessening the margin of difference between existing and former members of a scheme: as I commented below, CPI tends to be lower than RPI (on this data set, by about 0.67% per annum).

In any review of pensions provision over the next few years, it is to be hoped that the mantra of ‘fair and affordable’ doesn’t lose sight of the first half of such a phrase.