The Government's pension reform

Written evidence submitted by the Civil Service Pensioners’ Alliance

1. Introduction

1.1 Age UK, the Civil Service Pensioners' Alliance, the National Pensioners’ Convention, the Public Service Pensioners' Council and the Occupational Pensioners' Alliance have recently formed a coalition of older people's organisations in order to campaign on the issue of pension indexation, and in particular the proposed change from the Retail Price Index (RPI) to the Consumer Price Index (CPI). We have therefore limited our submission to the impact that this change will have on older people.

2. The switch from the RPI to the CPI

2.1 The June 2010 Emergency Budget announced that the Government would use the usually lower CPI instead of the RPI for annual up-ratings of benefits and tax credit, the second state pension and public sector pensions. CPI would also be used as the prices component of the 'triple lock' indexation of the basic state pension from April 2012.

2.2 These changes will also apply to many private sector occupational pensions because the Government has changed the statutory minimum level of indexation for private sector schemes from RPI to CPI. This means that, unless their trust deeds explicitly state that indexation has to be at the rate of RPI inflation, private sector defined benefit schemes can begin to increase payments by the CPI measure of inflation rather than RPI.

2.3 Since these changes were announced our coalition has been working to raise awareness of the impact on pensioners, amongst Parliamentarians, the media, and the general public.

3. The suitability of the Consumer Prices Index

3.1 The Secretary of State’s obligation under Section 59 of the Social Security Pensions Act 1975 and Section 151 of the Social Security Administration Act 1992 is to increase pensions in line with the "general level of prices".

3.2 The Department for Work and Pensions has said that it believes that CPI is a more appropriate measure of inflation faced by pensioners than RPI, but has provided no evidence to support this assertion.

3.3 The Government failed to consult the National Statistician, the Government’s principal adviser on official statistics, before making the change.

3.4 The Royal Statistical Society, which represents the UK’s leading statisticians, has said that CPI fails to reflect the spending patterns of pensioners. The Institute for Fiscal Studies has shown that most pensioner households are not shielded from many of the costs excluded from the CPI, and the UK Statistics Authority, which oversees official data, has also said that they do not believe the CPI should become the primary measure of price inflation until housing costs are included.

3.5 The main difference between the rate of CPI and RPI inflation is that the RPI uses the arithmetic mean where as CPI uses the geometric mean of prices. This means that the measurement of CPI takes account of likely shifts to cheaper goods when prices increase. The CPI measurement of inflation is therefore likely to be permanently lower than the rate of CPI inflation. The use of the geometric mean in CPI also, in our view, puts it beyond the realm of the indices legally available to the Secretary of State for the DWP in assessing, in line with his responsibilities under Section 150 of the 1992 Social Security Administration Act, increases in the general level of prices. Our coalition believes that the purpose of indexation is to maintain a standard of living. This should not presume substitution into cheaper goods.

3.6 In many cases, pensioners do not have the option to switch to cheaper goods. Many utility and transport charges are linked to the RPI, meaning that the gap between costs faced by pensioners and pension increases will widen year on year.

3.7 The CPI also excludes the costs faced by owner-occupiers, such as mortgage interest. A significant number of pensioners face mortgage costs in their retirements and this proportion is set to increase into the future. A number of significant costs faced by most pensioner households such as home insurance and other home maintenance costs, including services which pensioners increasingly have to buy-in as they get older, are not covered by the CPI. These pensioners will find it difficult to make ends meet if their pensions do not increase in line with their housing costs.

3.8 Therefore, we firmly reject the assertion that the CPI is a ‘better’ measure of inflation for pensioners.

3.9 The Coalition parties have admitted that the CPI is not the best measure of inflation and the Coalition Agreement committed the Government to work with the Bank of England to reform the index to include housing costs. We have, however, yet to see any firm proposals to adjust the index to include housing costs.

4. The impact on pensioner income

4.1 John Hutton’s interim report on Public Service Pensions, published on 7 October, stated that:

"This change in the indexation measure [from RPI to CPI] may have reduced the value of benefits to scheme members by around 15 per cent on average. When this change is combined with other reforms to date across the major schemes the value to current members of reformed schemes with CPI indexation is, on average, around 25 per cent less than the pre-reform schemes with RPI indexation."

4.2 The Hutton Commission's terms of reference are to conduct a review of public service pensions within the context of protecting accrued rights.  To make this change before the final Hutton report is published, clearly undermines the review, and is an assault on pensioner income.

4.3 With CPI currently at 3.1%, lagging behind RPI at 4.6%, the difference between RPI and CPI will make a real difference to pensioner income. Next year a £10,000 annual pension would have been revised to £10,460 under RPI, but under CPI it will go to just £10,310 - £150 less. These differences will be compounded year on year.

4.4 Actuarial Consultants Towers Watson have found that the switch would mean that an occupational pensioner currently receiving a pension of £10,000 a year will be more than £800 a year worse off by 2016, a significant reduction in future income.

4.5 Taken cumulatively, the effect over a number of years will be significant, with private and public sector pension savers potentially losing up to £250bn over the next 40 years in lost inflation linked rises.

5. Contractual obligations

5.1 Since 1972, scheme literature has said that public sector pensions will be increased in line with RPI and, hitherto, that link has been honoured. Employees have been led to believe that the RPI link would be maintained and many have made financial choices based on that understanding. In our view, the failure of pension scheme administrators to ensure that their working members and pensioners were aware that there could be changes to the indexation arrangements of their schemes amounts to maladministration, which will be challenged, both internally and, possibly, legally, by individual members of those pension schemes.

5.2 Many have entered into particular financial arrangements, such as the purchase of added years, the conversion of lump sums into pensions and acceptance of moves to other employers on TUPE terms, on the clear understanding that pensions would increase in line with the RPI.

5.3 We believe that a move to CPI would be a breach of the contractual obligations freely entered into by Government as an employer and is akin to pension mis-selling.

6. Pre-election assurances

6.1 Before the General Election, we sought clarification on index-linking from the three main political parties. All three parties gave their assurances that there were no plans to change index-linking arrangements.

6.2 In a letter dated 27 April 2010, Philip Hammond, the then Shadow Chief Secretary to the Treasury said:

"Indexation of pensions in payment is an established part of pensions legislation. The Conservative Party has no plans to change the current index-linking of public sector pensions in payment. We agree with the view that the right to indexation of pensions already accrued is part of the accrued pension rights and those rights will be protected."

6.3 The then Liberal Democrat Shadow Pensions Minister, and now Pensions Minister, Steve Webb MP said in a letter dated 12 April 2010:

"We are very clear that all accrued rights should be honoured: a pension promise made should be a pension promise kept. Therefore we would not make any changes to pension rights that have already been built up. I have confirmed that I regard accrued index-linked rights as protected."

6.4 At a meeting held on 30 March 2010, Angela Eagle said on behalf of the Labour Party:

"Following the agreement for change reached with the unions in 2005, we are satisfied that public sector pensions are affordable, sustainable and fair. We have no plans to change the current index-linking arrangements."

6.5 We therefore believe that the Government deceived pensioners ahead of the General Election.

7. Conclusions

7.1 It is clear that this change is not a temporary move designed to ease the current financial situation, but it will be a permanent change. It is a calculated move that will see decreases in pensioner income year on year, in perpetuity and will increase the number of pensioners in poverty and further reliance on means-tested benefits, to which we are strongly opposed.

7.2 Members of our coalition would be available to give oral evidence to the committee should this be required.

February 2011