They're as bad as each other

Kennyboy66

In 1997, Gordon Brown abolished Advanced Corporation Tax which had the effect of reducing private pension scheme funds by approx £5 billion per year.

The £5 billion figure is generally acceped by actuaries such as Watson Wyatt.

This was lambasted by the Tories and still is.

In 2010 George Osborne changed the uprating of private sector defined benefit schemes from RPI to CPI.

The effect of this according to the DWP (department work and pensions) is a reduction in pension rights of approx £5.7 billion per year.

This is bascically a transfer of money from pensioners and workers to shareholders.

The change was made becuase it was argued that RPI includes housing costs and CPI doesn't - thus CPI is a better index to use.

However (and this is hardly picked up in the press), CPI will always be less than RPI over anything other than the shortest period.


Why ?


Because its calculated using a Geometric mean rather than an Arithmetic mean. This "formula" effect, means that CPI under shoots RPI by about 0.8% per year over the last 15 years - and it will always undershoot RPI over a period of more than say 3 years, regardless of housing costs.



Why aren't defined benefit members (of which there are many for are retired or deferred) making a fuss of this.


Or are we like crabs in a barrel, more worried about what the person next door is getting?

Linton

Kennyboy66 wrote: »

......
In 2010 George Osborne changed the uprating of private sector defined benefit schemes from RPI to CPI.

He didnt. Private sector upratings are purely the responsibility of the trustees operating under the scheme rules. The government requirement is that the uprating cant be less than CPI.

Kennyboy66

Linton wrote: »

He didnt. Private sector upratings are purely the responsibility of the trustees operating under the scheme rules. The government requirement is that the uprating cant be less than CPI.

This was the wording to BT pensioners from the trustees

"Having taken legal advice, the Trustee has been advised that on the basis of the Government's stated intention, your pension increases will be indexed to CPI with effect from April 2011. The Trustee has no choice in this. The change is brought about by Government. There has been no change in the Rules of the Scheme".

Now BT may be an exceptional case as the taxpayer appears to be on the hook for their pension black hole anyway as a result of poor drafting of the privatisation legislation.

Or we could refer to the pensions advisory service

http://www.pensionsadvisoryservice.org.uk/workplace-pension-schemes/final-salary-schemes/annual-increases.

The statuatory basis has changed to CPI, however there is no "over-ride" legislation planned, if the pension rules specifically state RPI.

Quote fromPensions minister Steve Webb

[FONT=&quot]"where RPI was not "hard-wired" into scheme rules, CPI would be used to set the floor for increases to private sector pensions but said the government would not override scheme rules.[/FONT]"

Generali

They look to me like two pretty different things.

The changes in 1997 reduced the amount of tax relief that pension schemes could claim on dividends. In effect it was a tax on pension funds, reducing the total amount of money available to the members of the fund.

The change from RPI to CPI indexing will mean that the individual's claim on a part of the pot reduce rather than decreasing the size of the pot itself. AIUI, this mostly (exclusively?) impacts on privatised companies where in most cases the taxpayer is on the hook for any 'black hole'.

IMO these changes are a part of the Tories trying to cut the burden on the state of future pensions by reducing unfunded liabilities. You can argue whether that is right or wrong but this isn't the same as the changes introduced by Labour.

FWIW, my opinion is that the promises that have been made can't be afforded and so will never be paid by a Labour or a Tory Government despite promises to do so being made by both parties. Whether you like it or not you will not get what has been promised to you.

Kennyboy66

Generali wrote: »

They look to me like two pretty different things.

The changes in 1997 reduced the amount of tax relief that pension schemes could claim on dividends. In effect it was a tax on pension funds, reducing the total amount of money available to the members of the fund.

The change from RPI to CPI indexing will mean that the individual's claim on a part of the pot reduce rather than decreasing the size of the pot itself. AIUI, this mostly (exclusively?) impacts on privatised companies where in most cases the taxpayer is on the hook for any 'black hole'.

IMO these changes are a part of the Tories trying to cut the burden on the state of future pensions by reducing unfunded liabilities. You can argue whether that is right or wrong but this isn't the same as the changes introduced by Labour.

FWIW, my opinion is that the promises that have been made can't be afforded and so will never be paid by a Labour or a Tory Government despite promises to do so being made by both parties. Whether you like it or not you will not get what has been promised to you.

Clearly the Brown raid affected money purchase schemes (and had no immediate impact on defined benefit members - although the unintended consequence was to add to the pressure to close them). This one affects defined benefit members but not defined contribution ones.

Supposedly it is between 25 and 40% of schemes that are affected, the rest have RPI explicitly stated in their legal documentation.

It is certainly not just the privatised utilities and includes the Labour party pension scheme (I'm sure you will love the irony).

Others affected included Tesco and Morrisons (deferred members only).

It hardly matter to a pensioner whether your pot grows less slowly (the 1997 change) or your income in retirement grows less slowly (the 2011 change). Surely the effect is the same.

It appears the only difference is that the 2 changes broadly affected 2 different groups of pensioners / scheme members.

Thrugelmir

Kennyboy66 wrote: »

although the unintended consequence was to add to the pressure to close them).

Yes, because Companies and the Employees themselves would have had to fund the shortfall.

Seems as if the similarity ends. As Unions seems to believe that there pensions are immune from the realities of global finances and public employees are unwilling to pay more.

vivatifosi

As a trustee this is an issue I've tried to raise on here about four or five times in the last year to a wave of indifference. It's an issue I know a fair bit about, though not to the degree an actuary would, but as a lay person trustee.

If a private scheme's documentation says something along the lines of "pensions will be risen in line with the government measure of inflation", then the government's changing the measure of inflation from RPI to CPI means that schemes should change. It doesn't matter a jot that when the scheme schedules were drawn up it meant RPI, one sweep of a pen from the government and it all changes. I can tell you, the BT trustees are right. We are left with little say in the matter. It doesn't matter that RPI was implied, or that CPI had never even been thought of when the deeds were drawn up, tough.

I don't agree with the change, I think ALL governments should keep their noses out of the business of private pension fund. Ultimately I think it is also one reason the strikes will fail: you can't possibly have a situation now where private pensions are forced down the CPI route, only for the government to backtrack and write RPI back into its own schemes.

In terms of the difference between this and Gordon Brown. Brown's was a cynical raid. This is more of a government c0ck up.

Kennyboy66

Thrugelmir wrote: »

Yes, because Companies and the Employees themselves would have had to fund the shortfall.

Seems as if the similarity ends. As Unions seems to believe that there pensions are immune from the realities of global finances and public employees are unwilling to pay more.

This is a change effectively imposed on private sector pensions (defined benefit) where the trust deed does not explicitly say RPI.

Imagine the howls of protest if it was the other way round and it was costing private firms £5.7 billion a year.

The indifference and ignorance is stunning.

Kennyboy66

vivatifosi wrote: »

As a trustee this is an issue I've tried to raise on here about four or five times in the last year to a wave of indifference. It's an issue I know a fair bit about, though not to the degree an actuary would, but as a lay person trustee.

If a private scheme's documentation says something along the lines of "pensions will be risen in line with the government measure of inflation", then the government's changing the measure of inflation from RPI to CPI means that schemes should change. It doesn't matter a jot that when the scheme schedules were drawn up it meant RPI, one sweep of a pen from the government and it all changes. I can tell you, the BT trustees are right. We are left with little say in the matter. It doesn't matter that RPI was implied, or that CPI had never even been thought of when the deeds were drawn up, tough.

I don't agree with the change, I think ALL governments should keep their noses out of the business of private pension fund. Ultimately I think it is also one reason the strikes will fail: you can't possibly have a situation now where private pensions are forced down the CPI route, only for the government to backtrack and write RPI back into its own schemes.

In terms of the difference between this and Gordon Brown. Brown's was a cynical raid. This is more of a government c0ck up.

I wonder.

It was consulted on and in this document the impact was well anticipated, in fact, seemingly desired.

http://www.dwp.gov.uk/docs/cpi-private-pensions-consultation.pdf


You are spot on with your conclusion though about the public sector is doomed to fail.

vivatifosi

Kennyboy66 wrote: »

I wonder.

It was consulted on and in this document the impact was well anticipated, in fact, seemingly desired.

http://www.dwp.gov.uk/docs/cpi-private-pensions-consultation.pdf

I can't say any more without going into the specifics of my scheme. Its fair to say that a lot of people in pensions see it as unnecessary meddling.

The companies I know that are affected are not BT. They aren't big former state owned industries. They are just the average British company in the street. There's nothing in this for the government (other than battering its own workers around the head with the same stick). In fact I still can't get my head round how this won't cost them more if they have to take on the funding gap for very poor pensioners. Except that they seem to be moving towards a flat rate pension, so I may be answering my own question. However this is undoubtedly good news for companies with big deficits who are trying to fund pensions.

grizzly1911

vivatifosi wrote: »

In fact I still can't get my head round how this won't cost them more if they have to take on the funding gap for very poor pensioners. Except that they seem to be moving towards a flat rate pension, so I may be answering my own question. However this is undoubtedly good news for companies with big deficits who are trying to fund pensions.

By the time flat rate pensions take effect they will be out of date and probably of insufficient relative value for those soley or wholly reliant on it.

Things like the Fuel Benefit were an acknowledgment of this fact when introduced for then current pensions. It was politically more acceptable as they weren't increasing basic pension. The same goes for the MPG.

Unless a radical cut in provision is made across the board or removal completely for some cases then the flat rate will always need topping up for some of pension guarantee.

I believe that any "running down" of pension expectation now, will still have to be picked up in the future (as you suggest), unless we acknowledge that we are getting closer to second or third league state and accept the accompanying poverty and deprivation. Relentless increases in energy and food costs will magnify the problem.

As generali points out it is highly unlikely the promises made now will be held and further reductions/extensions in age will be seen across the board.

As pension provision is slowly getting more unaffordable for all, except top earners, it is something that needs to be totally reviewed top to bottom not just fudged haphazardly here and there. Of course we can just leave it to dog eat dog ....