The Coalition Government has changed the indexation for pensions from the RPI to the CPI
Previously the Society of Pension Consultants (8/1/10) had called for an end to indexation of defined benefit pensions altogether and the then Shadow Minister for Pensions, Nigel Waterson, confirmed that he was seriously considering this. At the moment most pensioners who have paid into a final salary scheme in good faith, receive an annual increase based on the Retail Price Index. The average pension in payment is about £5000 pa. Removing the indexation will lead to a decrease in the standard of living of some of the UK’s already most vulnerable members living on fixed incomes.
Cuts in the occupational pensioners' spending power will damage government finances. A civilised society still has to provide enough for these people to live with dignity. Less from occupational pensions would mean more needs to come from taxes.
Over a ten year period, assuming inflation at 2.5%, a pension without an inflation increase would fall by over 20% - eg. a £5,000 pa pension would effectively be worth about £3900.
According to a study by the Institute for Fiscal Studies the annual inflation measured in the month of January 2009 saw the 30 to 39 age group enjoying deflation of 0.9 per cent compared with an incredible 7.1 per cent inflation suffered by those aged 80 or over.
In May 2006 following an announcement of the intention in the White Paper to restore the State Pension link to the wages index, The Times commented : "As a matter of principle, it is not clear to me why any group that is not in the workforce should be treated as if it was. Everybody is affected by prices, but it is only the efforts of people who are working that determines the size of the pay packets." And the Business Editor, Robert Cole, also argued that "Prices make the best yardstick for pensions".
On hehalf of the OPA Roger Turner wrote the following (unpublished) letter to The Times:
It is clear that recent correspondents know little about the poverty very many face in old age brought about to some degree by RPI vs Earnings increases in pensions. It is entirely clear why pensions should be increased by average earnings, they are deferred pay.
Pensioners worked to create the prosperity we now have and it is only fair that they share in what they helped create.
The RPI is a crude and unsuitable index for pensioners since it is based on average household expenditure. Patterns of expenditure are very different for pensioners compared to younger working people (pensioners do not often buy iPods). Many single people in their 80s cannot take advantage of supermarket “bogoff’s” and often have to buy smaller quantities of basic goods, which are significantly more expensive by weight or volume than large items for the same products. Many cannot get to supermarkets due to lack of transport and so have to pay premium prices at local shops. Council tax and utility bills all increase by more than the RPI.
To suggest the earnings link is unaffordable does not stand up to scrutiny. The UK has the meanest state pension system in Europe and with significant surpluses in the National Insurance Fund it is down to political will whether or not to increase the proportion of GDP spent on pensioners. Keeping the proportion steady at 5% condemns increasing numbers of pensioners to poverty.
I surmise that the correspondents will have good private or occupational pension provision and will not have to rely on the State pension and a meagre second pension. Perhaps they should talk to a few older pensioners.
The Government can make a real difference to many by restoring the earnings link. Unfortunately delaying it until 2012 fails to address the needs of very many very poor pensioners today. Some 400,000 do not claim the Pension Credit Guarantee Credit even though eligible. This needs to be addressed by removing the means test as soon as possible.
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