The Government's pension reform

Written evidence submitted by the National Federation of Occupational Pensioners

1 About the National Federation of Occupational Pensioners

1.1 The National Federation of Occupational Pensioners (N.F.O.P) is the oldest and largest occupational pensioners’ organisation in the UK, with 90,000 members nationwide organised into 185 branches.

1.2 N.F.O.P welcomes the opportunity to provide a submission to the Work and Pensions Select Committee on the Government’s plans for pension reforms.

2 Increases to the Pension Age

2.1 Increasing longevity means that increases to the pension age are inevitable. However, to allow people to plan for their retirement, there should be sufficient warning about when changes will happen. Once timetables are set out, they should not be changed without sufficient notice.

2.3 We are therefore concerned about the Coalition Government’s decision to change the dates for equalisation of the state pension age, introduced by the Pensions Act 1995, and the planned timetable to increase the state pension age for men and women set out by the Pensions Act 2007.

2.4 There is clear evidence that many women were unprepared for the

increase in their pension age which started in April 2010 despite having 25 years notice of the change.

2.5 The Pensions Bill will bring forward the date for equalisation from 2020 to 2018, and the date for the increase in the state pension age from 65 to 66, from between 2024 and 2026, to between 2018 and 2020.

2.6 To bring forward by two years the women’s retirement age to 65, and then add a further year only two years later, is unfair given that many women would have begun to make preparations for their retirement.

2.7 We believe that these changes set a dangerous precedent that risks increasing uncertainty and distrust in the pensions system.

3 Indexation and the revaluation of pensions

The differences between CPI and RPI

3.1 Last year’s Emergency Budget announced that the Government would use the usually lower Consumer Price Index (CPI) instead of the Retail Price Index (RPI) for annual up-ratings of benefits, tax credits, the second state pension and public sector pensions and allow private sector defined benefit schemes to change the basis of indexation for up-rating and revaluation.

3.2 The Government has claimed that it is changing the basis of indexation, because CPI is a better measure of the price increases faced by pensioners. We firmly disagree with this assertion.

3.3 The Department for Work and Pensions has provided no evidence that CPI is a more appropriate measure of inflation faced by pensioners than RPI. The Government also failed to consult the National Statistician, the Government’s principal adviser on official statistics, before making the change.

3.4 The main difference between the rate of CPI and RPI inflation is that the RPI uses the arithmetic mean whereas 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 RPI inflation.

3.5 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.

3.6 The CPI also excludes housing costs. Whilst it is true that many pensioners are owner-occupiers, an increasing number of pensioners still face mortgage costs and homeowners face costs such as Council Tax and insurance which are not covered by the Index. Pensioners will find it difficult to makes ends meet if their pensions do not increase in line with their housing costs.

3.7 Age UK’s index of the costs faced by the over 55’s underlines these problems by showing that the main costs faced by pensioners are increasing significantly faster than the rate of RPI, with costs faced by the oldest pensioners rising the fastest.

4 Indexation and the Pensions Bill

4.1 The Government has made it clear that it wants these changes to be long-term. This means that the guarantees against inflation that members of occupational pension schemes thought that they had bought as part of their contributions, will be reduced.

4.2 The Pensions Bill amends existing legislation that provides for revaluation or indexation of occupational pensions by removing reference to RPI. This will give those pension schemes without RPI as the basis of indexation the freedom to move to the usually lower CPI rate of inflation for future increases.

4.3 Rather than defining which index should be used we believe that it would be better if the Pensions Bill did not refer to the specific index used, but to increases in the general level of prices as approved by the Statistics Board.

4.4 This a future Government to chose to return the basis of indexation to RPI without the need for primary legislation, whilst giving pensioners and pension funds the certainty that the Government would not be able to introduce future changes to indexation without approval by the Statistics Board.

4.5 This is particularly important as the Government indicated in the Coalition Agreement that it may consider a ‘CPI- plus’ which takes into consideration housing costs. We believe that the Bill as currently worded could leads to uncertainty about if a new ‘CPI- plus’ index could be introduced without the need for primary legislation.

4.6 The Government’s own impact assessment [1] recognises that the main cost of this policy is to members of private sector defined benefit pension schemes, and the main benefit is to sponsors of DB pension schemes who will see the liability of schemes reduced. It is expected to decrease the value of pensions by £2.3 billion (in 2010/11 price terms) over the lifetime of pensions payable from existing DB liabilities.

4.7 The Government Consultation on the effect of the switch to CPI concentrates on the impact on pension scheme administration, liabilities and their sponsoring employers. There is no mention of the impact of such a change on the pension fund beneficiaries and on the UK economy in the longer term.

4.8 A reduction in pension payments will lead to reduced spending by pensioners. The so-called "grey pound" is important to the UK economy as a whole and so any reduction could be damaging. There will also be a consequential loss of income tax revenue. Companies will receive increases in their profits from significant reductions in their pension scheme liabilities. Although some of this will be recouped from increased Corporation Tax receipts, much of the money will go to offshore investors and will not be taxed in the UK.

4.9 Add to this the problem that very many people are not saving enough for their retirement; the proposed changes will inevitably exacerbate pensioner poverty in the future.

5 Auto-enrolment

5.1 The Pensions Bill contains measures to amend the automatic enrolment provisions for workplace pension schemes.

5.2 We are strongly in favour of automatic enrolment and of the employer contribution. Although not perfect, it will mean that many more people in work will be saving for their retirement.

5.3 However we are disappointed that the earnings trigger has been increased to £7,475. The target audience for NEST was always those on lower to middle incomes for whom there is no employer provided pension scheme. Although we accept that there is a question of "is it worth saving?" because of the interaction with Pension Credit, we believe that the trigger should be set lower. Once an employee starts work and gets used to a particular take-home pay, that is what they expect and many will resist starting to contribute 4 percent of their salary when they reach the new trigger point. We accept that the employer will have to re-enrol at a later date but there is, in our view, more likelihood that employees will choose not to make contributions.

5.4 We are also concerned at the period of grace for employer contributions to commence. Employers have known about this for many years and should have been preparing to the introduction of NEST. The employer contribution is vital to ensure a reasonable level of investment over the longer term and the early years investments have the longest chance to grow in the future. We can see no justification at this point to allow any period of grace.

February 2011