Posts filed under 'Retirement'
- “Predators stalk your pension”, warns The Pensions Regulator
I recently had a text message from one of these organisations offering me the opportunity to liberate my pension. Tempted to reply? I might have been, if I had been an ordinary member of the public and didn’t know it was a scam.
It came on the day after news broke that the Advertising Standards Authority (ASA) had banned a lead generation company from sending unsolicited text messages offering pensions liberation to consumers. The ASA found the messages were sent unsolicited and did not reveal the identity of the marketer and thus broke the appropriate advertising code.
There has been an increased focus on pensions liberation schemes this year. With all the regulators taking increased interest in pensions liberation activity. The Pensions Regulator has also launched a highly visible awareness campaign with literature featuring a large picture of a scorpion on the front and headings such as “Predators stalk your pension”. If you are sent an unsolicited message think of the scorpion.
Unfortunately this year has seen a significant increase in companies singling out savers and claiming they can help you cash your pension early. There are limited cases where it is possible, but the vast majority of such claims will turn out to be bogus with serious tax consequences for you. You should be particularly suspicious if you are approached out of the blue over the telephone or via a text message. The best advice is to simply not reply and never give out personal information or financial information to a cold caller. Remember if it sounds too good to be true, it probably is. Never rush into a pension transfer, for if you make a transfer to a pension liberation arrangement, even in good faith, you are risking tax charges and penalties of more than half the value of your pension savings. The only people getting rich are the fraudsters and you will get an unpleasant tax bill.
I know of cases where we have tried to warn individuals off pension liberators, and they have come back to us to say they have rung up their dodgy advisers and have been assured that all is well or there is a legal loophole and so they want to go ahead. There are some people you just cannot help. If you have been tempted by one of these offers don’t accept the assurances of those involved in the transaction, get the advice of an independent IFA who is not involved in the transaction and not linked to the organisation offering you the deal. In some cases, checking addresses of advisers and schemes on Google Maps Street View should start alarm bells ringing. If the premises looks dodgy, or is it obviously a mail box company, ask yourself why! And what are the odds if the money disappears of getting it back?
Pensions liberation has never been more in the spotlight and, if you have been unlucky enough to make an illegal transfer, the odds of the tax man not finding out have never been smaller. I know that Buck is in almost daily contact with one regulator or another over pensions liberation matters.
I am, I understand, in good company. The Pensions Minister Steve Webb received a similar text message not so long ago. It’s never been easier for villains to contact vast numbers of potential “marks” using your phone or by text, and in every thousand there is always going to be one who bends down to see what that is in the sand.
Managing Director, Europe
The postings on this site are my own and don’t necessarily represent Buck’s positions, strategies or opinions.
The government should stop raiding the pensions piggy bank
The Rolling Stones have been in the business for more than 50 years
It has just been announced that the Rolling Stones have been named as one of the three headline acts for this summer’s Glastonbury Festival at Worthy Farm in Somerset, on the final weekend of June. Formed in 1962 and now into their 51st year, they are probably the most successful English rock band. It will, perhaps surprisingly given their popularity, be the first time the band have played at this event.
Whilst the abolition of the default retirement date should mean that like the Rolling Stones we can all work as long as we like, there will be many of us who do not want a working career lasting over 50 years.
The House of Lords Committee on Public Service and Demographic Change (the Committee) has recently published a report entitled “Ready for Ageing?” The report heavily criticises the Government calling it “woefully underprepared” for demographic changes which will mean a rapid increase in the average age of the population. The report shows that England will see a 50% increase in the number of people aged 65 and over, and a 100% increase in those aged 85 and over, between 2010 and 2030. Yet this issue is not being properly addressed. Simply removing the default retirement age, and continually increasing the age at which state pension is paid, is only tinkering at the edges of the problem.
The committee warns that defined contribution (DC) arrangements have serious defects and the current DC system is not fit for its purpose. Something many of us in the pensions industry have been saying for years. Employers in their rush to bail out of defined benefit arrangements, which were fit for their purpose but exposed employers to what many feel is unacceptable levels of risk and cost, have increasingly failed to put in place an alternative arrangement which will give an adequate level of pension to their workers in retirement. And if employers have been abdicating their responsibilities, successive governments have refused to shoulder any of the responsibility for adequate pension provision in the first place. Even after the introduction of the new flat rate pension proposed by the coalition government we will still have one of the worst state old age pension in Europe.
The committee is right, people need to be better informed about the amount they need to save into a DC scheme to achieve a half reasonable pension but, even if they knew most people would not be able to afford that level of payment into their DC schemes. Moreover, it does not get round the fact that current DC arrangements are not fit for their purpose in the first place.
The Treasury’s attacks are damaging to the long term best interest of the country
We need a government that looks into this problem on a long term (not just to the next election) basis. I do believe Steve Webb, the Pensions Minister, is at least trying to do just that. Part of the solution for those employed by larger employers might be defined ambition pensions, where the risk is shared between both employers and employees rather than placed squarely on the shoulders of employees who are often ill equipped to deal with it. Employers need to take some responsibility for ensuring their workers have an adequate pension before they are the Rolling Stones’ age. The good ones will, but many will not. Automatic enrolment alone is unlikely to provide much of a solution, as even at an 8% contribution rate people are not saving anything like enough for a comfortable retirement.
The government, and in particular the Treasury, cannot continue to wash its hands of the problem and needs to do much more. A fly in the ointment seems to be the fact that the relevant government departments cannot, it appears, even come up with a consistent line between themselves; there does not at times appear to be much thinking going on there.
Following reports recently that the government was set to abandon plans to introduce minimum alcohol pricing, there was much laughter in the House when Ed Miliband asked the Prime Minister if there was “anything he could organise in a brewery?” He could have tackled him on the government’s pension policy at the same time. The Treasury’s constant attacks on pensions and tax reliefs associated with saving for them, in an attempt to achieve short term gain, couldn’t be more damaging to the long term best interest of the country. The rich don’t have to rely on pensions for their retirement, and the poor will at best be protected at a very basic level by state benefits; however, for those of us in between the outlook for our old age is bleak.
The government (and in particular the Treasury) cannot continue to turn a blind eye to the UK’s failing pension system, and should stop raiding the pensions piggy bank to top up its current account. Positive action is need across all parties to start to build up the public’s trust in the pension system, which has been so damaged in part by government action (from all three major parties) over recent years.
Living longer is, of course, good, but we (and that includes the government) need to look ahead and start making the necessary changes now to pay for the risks and costs associated with that.
There are many who feel a working life of over 50 years is too long. Let’s hope the Rolling Stones turn out to be the exception to the rule. Either that or B&Q are going to have to build a lot more stores.
Managing Director, Europe
The postings on this site are my own and don’t necessarily represent Buck’s positions, strategies or opinions.
Imagine being retired, 75 years old and nearly out of money. Your prospects for earning money are slim. You can’t pay your bills, and you can barely afford groceries. With the release of the Employee Benefit Research Institute’s report on Tuesday, March 19, we learned that 57% of US workers surveyed have less than $25,000 in total household savings and investments excluding their homes. Though astonishing, it’s not surprising.
Imagine being retired, 75 years old and nearly out of money.
The survey also found that 28% of Americans have no confidence they will have enough money to retire comfortably — the highest level in the study’s 23-year history.
These aren’t the Golden Years most people envision.
Yet the potential for such a scenario is very real. With the rise of 401(k) plans as the primary retirement vehicle over the traditional defined-benefit (DB) pension plan and the woefully inadequate participation in and self-management of them, significant changes to the way employers are helping employees prepare for retirement are badly needed.
Today’s employees are headed for disaster tomorrow
Less than half of private sector workers at any moment in time are participating in any form of employer-sponsored plan, according to the Center for Retirement Research at Boston College. This share has remained relatively constant over the last 30 years. The Center goes on to say that, whereas in the early 1980s most workers were covered by a DB plan, today most workers have a 401(k) as their primary or only plan.
Historically, DB plans were successful retirement vehicles for long service employees partly because employees generally didn’t have to make decisions about them. But the shift to DC plans is forcing employees to make more retirement-savings decisions than past generations. These decisions, unfortunately, are not the type that most Americans like or are willing to make. In its paper, “Using Behavioral Economics to Encourage Employees to Make Better Decisions About Their 401(k) Plans,” Sibson Consulting cites behavioral economics and human nature as the reasons why people make poor 401(k) plan decisions.
The result? According to the annual Wells Fargo Retirement Survey, more than one-third of Americans could wind up living at or near poverty in retirement. Not saving enough is not the sole culprit, either; many retirees don’t spend their retirement savings wisely, because they don’t know how to make good spending decisions to make the money last.
Today’s strategies for helping employees prepare to retire are not enough
Although some employees are ready, willing and able to make meaningful decisions about their retirement, many feel they don’t have the time to invest in making such important decisions or will never be comfortable with retirement decision-making, despite the tools available and the significant communications efforts aimed at educating workers.
In addition to communication and education, employers also have begun “nudging” employees to adopt more beneficial retirement-savings behavior through automatic plan features. Auto-enrollment into 401(k) plans and automatic contribution increases, for example, have been successful. Still, if DC plans are going to be the primary retirement vehicle for Americans, we have a world of unprepared workers. The automatic features help get individuals to participate, but they don’t provide much direction.
The future of employee retirement savings: a simple, automated program
Employees need a rational, well thought out retirement savings target. They need a rational plan to achieve the target, and they need routine progress reviews and adjustments. As it stands today, expecting individual employees to be able to do this work on their own is too much.
An automated program that enrolls employees in a 401(k) plan, sets a retirement target and contribution strategy based on pay,
Turning your savings plan into a retirement program.
age and retirement savings to date, manages the money in the plan, reviews outcomes, adjusts contributions as needed and ultimately sends retirees a “paycheck” will improve the odds that employees can live out their retirement comfortably without running out of money. The periodic reviews, automatic adjustments and monitoring would assure employees never veer too far off the path to retirement security by adjusting for unforeseen economic and real life events, yet such innovative automatic checks and balances do not exist today.
Employers would benefit greatly from a program like this, too, especially if it could be used with any plan design (e.g., any level of match and employer contribution). It certainly would improve the attraction and retention of staff by providing a valuable benefit to many employees in a post-DB world.
A retirement program that provides employees with this structure would enable them to monitor their progress toward their goals throughout their career without the burden, stress or responsibility for the type of retirement plan management that is unrealistic to expect of employees. With such a model, when the sun finally sets on their careers, employees may enjoy true Golden Years, having saved enough money to at least live out their remaining years in dignity and comfort. One thing is for sure: they certainly won’t be left out in the dark, as many are headed toward today.
Ted Goldman is a principal and retirement actuary with Buck Consultants,
How are you saving for your retirement?
It’s no secret that the way Americans must save for retirement today is much different than it’s ever been. In 1984, 24.2 million people had defined benefit pension plans funded by their employer. Retirement was an obtainable goal. Today, there are only 11 million individuals in DB pension plans, as the primary vehicle for retirement saving has shifted to become the defined contribution plan, including the 401(k).
Although DB plans have been on the decline for a long time, the Pension Protection Act accelerated their demise. In 2006, in an effort to safeguard DB pensions from funding shortfalls, the act required companies to guarantee that plans were completely or nearly funded, forcing employers to freeze or eliminate DB pension plans altogether and move to the DC model.
The shift to the DC plan has made it necessary for Americans to make more financial decisions – many of which they are ill prepared to make – than ever before. As a result, many Americans will struggle to retire. In fact, more than half of Americans are in danger of not having enough money to maintain their living standards when they leave the work place, according to the Center for Retirement Research at Boston College.
Employers have turned to education to help employees better plan for a successful retirement. But is education enough? Are they motivated enough to learn everything they need to learn to make wise retirement saving decisions? And if they are motivated, are they being taught enough?
Most commonly, employees complete education sessions through an online portal at their convenience. The sessions start with the basics, such as a vocabulary lesson on frequently used retirement terms and a description of the differences between DB and DC retirement plans.
The education sessions emphasize the need for employees to start saving for retirement early and discuss the importance of setting a retirement savings goal, regularly increasing contributions and managing debt. Employees may also learn about investment and savings projections, diversifying their portfolios, choosing the right investments and reviewing their plan on an annual basis.
And that’s where the education many times ends.
Yet, even with that education effort, many employees either are not saving at all or saving inadequately for retirement. According to a Life Insurance and Market Research (LIMRA) study, 65% of workers earning between $40,000 and $99,999 annually are saving less than 5% of their income for retirement and 49% of Americans are not saving at all, up from 30 % in 2009. It is no longer a matter of “when” they are going to retire but “whether” they will be able to retire. If this is the return employers are getting on their investment in retirement education, they would be better off investing the money in their employees’ 401(k) plans.
With such abhorrent results, it hardly matters, then, that employees are not learning how to spend their savings once they reach retirement. Many of them won’t have much to spend any way. Baby Boomers are the first generation that must decide how to allocate their retirement savings themselves, but if there’s no savings, there’s nothing to allocate. And those who have managed to save some are at great risk of exhausting their savings before their lives end.
So if education isn’t working, what will?
The evidence is clear: employers need to provide their employees with a way to save for retirement that requires little effort on their part. They need an automated retirement program that ensures they are saving the right amount for retirement, with automatic contribution adjustments made as market fluctuations dictate. They need a program that puts them on a path to reach a realistic retirement goal and age based on, among other things, salary history, years of employment and age. They need the security of knowing they will have enough money to get them through their “Golden Years,” with tightly managed savings withdrawal patterns.
Said another way, employers need to provide employees with a retirement program that incorporates all of the paternalistic qualities the traditional DB plan provides without shouldering the lion’s share of the financial burden of their employees’ retirement.
Although DB pension plans are nearing extinction, their attributes have great merit in solving today’s retirement crisis. Incorporating those attributes into a DC retirement program is a viable, realistic solution to the retirement crisis facing the United States today.
Jeff Leonard prepared this post while at Buck Consultants. He has since left the organization.
Are you getting a fair return on your beans?
The Pensions Minister Steve Webb last week reiterated his opposition to a cap on pension scheme charges unless, in his words, people are being enrolled into poor value pension schemes. He said there was no need for the Government to set a cap as there was currently a lot of choice in the market. He cited the “baked bean test” and said “Why doesn’t the government set a price cap on a tin of baked beans? We don’t need to because there’s a vibrant market, people have lots of choice.”
Pensions Minister Steve Webb: "Why doesn’t the government set a price cap on a tin of baked beans? We don’t need to because there’s a vibrant market, people have lots of choice."
The Pensions Minister said it would also be difficult to determine what level any charge cap should be set at. Stakeholder schemes had a cap of 1.5%, but if someone were paying charges of 1.5% today they would be upset if someone else was only paying charges of 0.5%. Yet 1.5% seemed reasonable when the now largely defunct stakeholder regime was introduced. The Pensions Minister said signs at the moment were encouraging, and charges are reducing to a level that 10 years ago would not have been dreamt of. I shudder every time issue of pension scheme charges surfaces, because it’s a bad argument, and misses the real problems behind defined contribution pension schemes. Don’t get me wrong, I am a keen advocate of fee transparency, and that providers must be up front about the fees they are charging. But that is only a tiny part of the issue. What you get back from a defined contribution scheme depends on a number of factors. Fees taken out of your pot by providers is one issue. However your eventual income in retirement is dependent on the amount you and your employer pay in, the period over which you make payments, the return on the investment of your pot over the years and vitally what “pension” you can buy with your pot on retirement.
I might not be upset about paying 1.5% of my pot each year in charges if my pot is rising at 5% a year, whilst my neighbour who is only paying 0.5% in charges is getting a 2% return. But leaving aside the jealousy bit, about someone getting a better rate of charges or return than me, the big issue at the moment is what my pot will buy me in retirement. Generally in the UK a defined contribution pension scheme member must buy an annuity at retirement to provide him or her with a pension for life.
There are very few financial instruments with a history as long as annuities. The word derives from Roman times and comes from the Latin “annuus” meaning recurring annually. The frequency in which stipends were paid to Roman citizens and soldiers in return for military service or financial contributions to Rome. Annuities even pre-date baked beans. The problem is that annuities in the UK are at an all-time low. So however much you saved, over whatever period, and however low the charges, and however high the return, people retiring today are getting a raw deal. They are getting nowhere near as many beans as previous generations of retirees.
Recent research suggest the pension you could get from a pension pot of £100,000 has halved in the past 18 years. A story in the Mail which caught my eye, and which accords with what I am seeing, says that a 65 year old man wanting a fixed pension (not inflation linked) and with no spouse’s pension could have got £11,380 a year in January 1995, but would get just £4,920 today, a staggering 57% decrease. So, as the Pensions Minister suggests, while provider charges are falling to levels not dreamt of 10 years ago, returns on your pension pot have taken a similar nosedive. I realise that there are a number of reasons for the reduction. In particular over the 18 years people are living longer, but 57% is a big drop. If the size of your baked bean can dropped by 57% there might be a similar sort of backlash at supermarkets as if horse had been found in your burgers.
The Mail article gives as an example a 65 year old man who retired on a £7,000 a year (single life, with no spouse’s pension) annuity in January 2008. If he had a younger brother who retired today he would only get £4,920 a year. Would there really be that much difference in the life expectancy of two brothers 5 years apart or other good reasons for this difference. Moreover, if this brother on £4,920 dies at age 45 he will not even get the amount he put into his pension pot (£100,000) back. Much as I enjoy having a pop at providers for providing poor value it is far too simplistic just to blame them. They find themselves in an impossible position, for at the moment they have to buy low yielding assets which lead to poor rates because the alternative requires them to hold much more risk capital on which they can generally make a better return elsewhere.
The Financial Services Authority announced last week they are to launch an inquiry into the £11bn annuity market amid concerns that pensioners are not getting a good deal. The investigation should concentrate not on the overall level of annuities, albeit they are at an all-time low, because providers can do little about that currently. It should focus on how annuities are advertised, and making sure pensioners get the best available deal at any given time (and shop around) rather than just taking the deal offered by their current insurer. The insurers who have offered worse rates to their long standing loyal customers and relied on their inertia to make bigger profits must be in no doubt that the Financial Services Authority is onto them. In this time of historic low annuity rates, all that can be possibly done needs to be done to make sure each pensioner gets the best possible deal at the time he/she retires.
The even worse news is that with gender neutral pricing and Solvency II hanging in the background, as a result of our European friends’ actions, annuity rates could fall even lower. There are some pensions professionals suggesting rates will at best stay at current record lows for some time. Let us hope in the above example there is not an even younger brother, because his only hope is B&Q!
One of the biggest problems with annuities is that it’s a once in a lifetime deal, once you have purchased an annuity you cannot swap annuity provider later on if rates dramatically improve. We gave up Latin in this country some time ago and unless something can be done about annuity rates soon, I think it’s time to put annuities as well as beans on toast.
Managing Director, Europe
The postings on this site are my own and don’t necessarily represent Buck’s positions, strategies or opinions.
The experts do not always get it right.
Prior to the 1987 Hurricane, the worst to hit the UK since 1703, Michael Fish told viewers not to worry as a hurricane was not “on the way”.
Five million public sector workers should today generally be celebrating the proposed changes to the state pension scheme and the abolition of contracting out. Only those who cannot afford to pay a 1.4% increase on relevant earnings (£5,564 pa to £ 40,040 pa in the current tax year) and continue to pay their mortgage and eat have cause for complaint. Yet today I see headlines in newspapers and TV news bulletins suggesting quite wrongly that public sector workers are losers in the proposed changes to legislation.
Yesterday the Government confirmed that contracting out of the state second pension will cease from 2017. This does mean public sector workers will pay an addition 1.4% of relevant earnings in National Insurance (NI). However the Government also confirmed that when contracting out ceases the public sector benefits will remain unchanged. Additionally, public sector workers will get a larger state pension. Thus we are looking in real terms for them to possibly be 5-6% better off on average in retirement and the lower paid even more so.
The real value of their state pension increase as a percentage of pay varies according to age and pay. It’s more for lower paid and older public sector workers. Based on standard assumptions, for a 40 year old earning £15,000 per annum the increase in value is around 14% of the pay upon which NI is paid. If earning £35,000 per annum it’s around 4.5%. For the very low paid the percentages are even higher due to NI earnings thresholds – the extra state pension, of course, is the same regardless of earnings.
I am not sure whether the Unions have yet worked out just how good a deal the new system is for their members. Perhaps their best tactic would be to keep quiet? They wouldn’t want the private sector – where there are many marginal losers from the changes – to wake-up to the true position as they did in 1987!
Managing Director, Europe
A battle won, but the war has a long way to go
The Government today announced details of its long awaited reforms to the state pension scheme. The new flat rate state pension is to start in April 2017 and is the biggest reform of the state pension system for decades.
The current full state pension is £107.45 a week, but can be topped up to £142.70 with pension credit, and by the state second pension.
The new weekly flat rate of £144 (at today’s rate) is a radical change to the state system, but totally necessary if auto-enrolment is be a success. Steve Webb, the Pensions Minister, quite rightly said the nightmare scenario would have been to open the newspapers and to read, ‘don’t bother saving if you are a low paid earner as you won’t get anything extra for it.’ The new proposals outlined today ensure that headline will not happen.
The proposals I believe are extremely welcome. Although the transitional provisions are complex, Steve Webb has promised that everyone’s current position will be assessed and they will be contacted and told exactly what they need to do to achieve the full flat rate pension at state pension age.
Equally good news is the fact that anyone who has already earned a pension in excess of the flat rate under the current state system will have their benefits honoured. In addition credit will be given for time off work looking after children, the elderly, or disabled.
On the downside people will have to work longer. They will have to make 35 years worth of National Insurance (NI) contributions, rather than the current 30 before they get the full £144 per week. Furthermore, if you have not paid, I expect, at least 10 years’ worth of National Insurance (or got credit for it) you will not qualify for the enhanced state pension at all. Equally some will find they would have been better off under the old system.
Those current pensioners, and those who qualify before the cut-off date, will continue to receive their entitlement under the current system. Some of these will complain today’s announcement is not fair to them and I have some sympathy with that point of view.
While we will be studying the small print in the next few days we believe the Government is absolutely right to introduce this flat-rate pension and are fully supportive of the general concepts. It is a radical reform and inevitably it cannot please all of the people all of the time, but it is hard to argue against it. The flat-rate pension and the auto- enrolment provisions go a long way towards ensuring the majority of us will be above subsistence level in retirement. What they will not do is to provide us with adequate retirement benefits. Occupational pensions need to be reinvigorated and the Treasury has to stop clawing back tax relief, to encourage savings for pensions, if we are truly to enjoy what some of today’s lucky pensioners describe as life’s longest holiday.
Today’s proposals are a welcome step in the right direction but there is much further to go before we can get too excited. A battle has today been won but the war is far from over.
Managing Director, Europe
New mortality tables reflect longevity, will make plan deficits worse
Friday’s “Benefits & Pensions Monitor’s Daily Alert reports this finding:
“Manuel Monteiro, a partner, retirement, at Mercer, told the ‘Risk Management Strategies’ session at its ‘21st Annual Pension Outlook and Fearless Forecast’ that the current mortality tables are in the process of being revised. Early estimates are that the people are living longer than the current tables show and that their lifespans are increasing at a faster rate than previously predicted. This means that pension liabilities will be greater and deficits worse than what DB plans currently face because of the low interest rate environment. To counter this, plans may need to adjust their benefits, investment, and funding policies.”
I agree with these comments. Mortality is improving more than previously thought which will increase liabilities and therefore plan deficits as well. With low asset returns and decreasing discount rates, DB plans are being hurt on both sides. Decreasing discount rates result in higher liabilities. This – combined with lower asset values – results in funded ratios well below 100% for many plans. This greatly increases cash contribution requirements.
When you add to that the complexity of the Canadian legislative environment and various accounting standards that plans must comply with, DB plans have become unattractive for many employers.
Many plan sponsors are interested in de-risking strategies via annuity purchases, changes in how assets are invested, full plan windups, and movement to other retirement savings arrangements. Canada has been slower to move to defined contribution (DC) plans vs. the US, but we are seeing more plan sponsors head in this direction – particularly with multinational organizations with head offices in the US that are looking for a global, rather than country-specific, approach to pensions and benefits.
I think the one area where DB plans will continue to exist, at least for a short while, are union environments. But even there, there will be paring back of benefits such as removal of ancillary benefits like indexation and subsidized early retirement.
As a final note, increased lifespans also negatively impact DC arrangements where it’s the employees who are taking on the longevity risk.
Mary Cover, FSA, FCIA
Retirement Practice Leader, Toronto
Much ado about nothing
Everything that consumers buy has a price, which may change over time. The Retail Prices Index (RPI) and the Consumer Prices Index (CPI) are designed to measure such changes. The traditional way of viewing these indices is to envisage a shopping basket comprising all the different kinds of goods and services bought by a typical household. As the prices of individual items in this basket change, the total cost of the basket will also change. CPI and RPI are measures of average inflation, based on average household expenditure on the items in the shopping basket. As such, they do not measure the cost of living, rather, changes in the prices of goods and services consumed by households. The basis upon which the two indices are calculated are different and this has led to CPI generally being lower than RPI.
RPI has been an official measure of inflation for over 50 years, while CPI was only introduced in 1996. In the past sixteen years, there has been a general switch from RPI to CPI, covering items such as the UK inflation target, and the indexation of many pension scheme benefits. However, RPI continues to be used as the inflation measure for numerous purposes.
As part of a programme of work to maintain the quality of the statistics, the National Statistician consulted about aspects of the methodology used to calculate RPI in October 2012. There were four options on the table: three of them would have resulted in the gap between RPI and CPI being reduced. In the event, the decision was made to make no change to the way RPI is calculated – a huge surprise despite overwhelming support for its retention. The Government has today made it clear it was not a party to the decision making process.
The decision not to make any change is good news for pensioners. The current low interest rate environment and recent bouts of quantitative easing have done recipients of pensions in payment few favours. Effectively reducing RPI to bring it more into line with CPI would have only exacerbated these problems.
Many private sector pension schemes have still retained RPI as the measure of indexation for at least some groups of members and will probably be in two minds about this announcement. On the one hand, making RPI less expensive would have benefited such schemes, in terms of reducing liabilities, with many sponsors having already started to think about making future funding plans assuming a change would be made. It will be little comfort that they can now neatly avoid public relations issues with disgruntled members, who could have seen their benefits increasing more slowly than before.
Something about pensions isn’t changing – now there’s a novelty.
Managing Director, Europe
Government suggests reading the small print
Prime Minister David Cameron used a very well-known advertising slogan to sum up the state of the coalition government half way through its five year term. He said, “It is a Ronseal deal – it does what it says on the tin”.
What David Cameron was actually saying is we are doing what we promised. However today we learn, not for the first time, he might be recalling the tin. The 2010 Conservative pledge to protect universal pensioner benefits, including free television licences and bus passes is unlikely to be repeated at the next election. In addition the Government is floating the idea of stopping winter fuel payments to pensioners living in Spain, Greece, Cyprus, and other warm countries.
The Government having come out on the wrong side of an European Court of Justice case, to stop those UK pensioners living in Europe having the winter fuel allowance, are looking for ways of getting round the judgment and clawing back relatively small amounts from ex-pats who spend the winter somewhere warmer than Bournemouth. They are considering introducing a “temperature test”. Not on the pensioners themselves, but on the environment in which they are living. In 2011/12 the average daily winter temperature in the UK was 7.5 degrees centigrade whilst in Cyprus it was 16 degrees centigrade. Setting a temperature test of say 10 degrees centigrade could save much of the £13m of fuel allowance paid out to the pensioners living in Europe last year. Although you would not claw back any money from those expats living in Eire or Germany.
Paul Johnson of the Institute for Fiscal Studies said that wealthy pensioners are the one group that has not been affected by the austerity programme as a whole. He obviously does not rate MPs as a “group”. Wealthy pensioners should clearly be concerned that the Government has them on its radar now it has voted through real term cuts to working age benefits. What is meant by “wealthy” has yet to be defined. The fact that these “wealthy” pensioners may well have paid more than their fair share in taxes throughout their working lives was not mentioned, nor was the fact that some of those who winter in warmer climates could not be described as rich and may be doing so for family or health reasons.
Still, this is all a bit academic for most of the next generations of pensioners who, in no small part due to various Government policies over the years, are unlikely to fall under any definition of “wealthy”. Prudential’s Class of 2013 survey shows pensioners’ predicted retirement incomes have decreased for the second year in a row, with individuals retiring this year expecting an average annual income of just £15,300. There is not much chance of them wintering in Bournemouth let alone Benidorm.
However, in the future and with a tail wind auto-enrolment might get wintering pensioners as far south as the Isle of Wight.
Meanwhile I am off to buy a tin of Ronseal and look for the small print that says “This Government intends to make constant attacks on pensions and pensioners”.
Managing Director, Europe
This is my opinion and is not necessarily shared by Buck Consultants.