Window-dressing exercise conceals billions of pounds of pension cuts
The government announced in the emergency Budget that public service pensions would be increased in line with the Consumer Prices Index (CPI) rather than the Retail Prices Index (RPI). This was a cynical ploy to attack benefits that ministers hoped were not widely understood or valued.
The government argues that it believes CPI is a more appropriate measure of inflation for pensioners than RPI. But this is nothing more than window-dressing for a decision that cuts benefits to the tune of many billions of pounds. The decision has also had knock-on effects for millions of workers and pensioners in the private sector, who have found that they too will have their benefits cut because of the Budget measure.
It may not be obvious why changing the basis for indexing pensions and other benefits from RPI to CPI significantly reduces their value. The reason is that the way the indices are constructed means that CPI is always likely to be lower than RPI. Without going into detail (blog posts on the TUC's touchstone blog by Nigel Stanley and Richard Exell are informative for anyone interested in the technicalities) the Treasury's own projections show how CPI is expected to be lower.
The Budget Red Book included the following forecasts for CPI and RPI:
|CPI % ||2.4||1.9||2.0||2.0||2.0|
These small percentages conveniently mask the scale of the loss that will be caused by the change in indexation. The government's decision means that, from April 2011, many millions of pensions will be increased by 3.1% instead of 4.6%. While this is a clear loss (for someone with total pension income of £10,000, the loss is £150 in 2011-12) at first sight it does not look big enough to result in cuts of billions of pounds in benefits.
The reason the change is so significant is because the compounded effect over many years is much higher. For example, the loss of £150 in 2011-12 would become a loss of over £2,000 for the year 2020-21 if the difference between CPI and RPI remained constant throughout the period.
Analysis by John Hutton's Independent Public Service Pensions Commission estimated that the change would reduce the value of pensions for affected workers by 15%. The loss for a member who leaves a scheme before retirement age or a member of a career average scheme (such as the Nuvos section of the civil service pension scheme) will be much higher than 15%.
All members of the main public service schemes are affected by this change in indexation. Whether private sector scheme members are affected will depend on the precise wording of their scheme rules and, potentially, the legislation brought forward by the Department for Work and Pensions to enact the change.
Some private sector schemes, such as BT and BAe, refer to the legislation that increases public service pensions in the rules that apply to some or all of their members. In these cases, employers are likely to take advantage of the savings that will result from changing indexation from RPI to CPI.
Other private sector schemes refer specifically to RPI increases in their rules. The Department for Work and Pensions is currently consulting on whether employers in this position should be allowed to take advantage of the cost saving that would result from switching to CPI. Prospect's response to this consultation will be published on CutStop.
Prospect commissioned legal advice on the implications of the government's announcement immediately after the Chancellor's speech. This advice is being updated as the situation develops and Prospect is in close dialogue with the TUC and other unions on the issue, which is complex. As the order implementing the policy has not yet been laid before Parliament the opportunity for taking legal action has not arisen. We expect the legal position to be clarified shortly.
Prospect is encouraging members to write to their MP to object to the cuts to their benefits - see model letters in Resources list below. This action may not have an immediate impact on the change due in April, but maintaining the profile of the issue will make it easier to lobby for the change to be reversed.
Generic letter for MPs' vote on 17 February
Amend this generic letter template as you wish to send to your MP before they vote on Thursday 17 February on the Social Security Benefits (Uprating) Order and the draft Guaranteed Minimum Pensions Increase Order 2011. Not sure how to contact your MP?
Sector specific letters
Template for members in the nuclear Combined Pension Scheme to write to their MP.
Template for members in British Aerospace to write to their MP.
Briefing for members in the Connect sector
This briefing is particularly relevant to members at BT, on whose behalf the Connect sector has already been campaigning.