From the TUC

Will the government introduce a bill to reduce private sector pensions in payment?

23 Jul 2010, by in Pensions & Investment

Given how often we are told that public sector pensions are more generous than those in the private sector, there is some irony in the growing employer campaign to level down private sector pensions to public sector levels.

This flows from the Government’s decision – announced in the budget and covered here and  here on Touchstone – to index public sector pensions and most benefits in future to the generally lower CPI measure of price inflation rather than the previous RPI indicator.

Already ministers have announced that the minimum indexation standards that private sector DB pensions have to follow will in future be based on CPI.

None of this requires major changes in the law (though the ministerial statement suggests that some minor changes may be needed.) This is because the law simply requires the government to declare each year what the increase in prices has been. In the past it has been custome and practice to do this using RPI, but there is nothing to stop the minister using any measure they like.

The implications of this are set out in this helpful note on the DWP website.

So what are employers on about?

The 1995 Pensions Act introduced what is called Limited Price Indexation (LPI) which is a minimum standard that all schemes must meet (whatever their rules say).

How it works in practice is rather complicated (but explained well by the excellent Pensions Advisory Service here) .

In very simple terms it means that pensions built up after 1997 must go up in line with inflation up to a cap.

But what is important here is that this is simply a minimum standard that pension schemes must follow. Many do much better and have in their scheme rules a better guarantee than this minimum. Others reference the Government’s annual determination of price inflation and these scheme’s pensioners, like those in the public sector, already know that their pensions will be less generous in future.

But Aon reckon that 58 per cent of pension schemes (in a sample of 80) have rules that index their benefits to RPI.

(We need to be cautious about these kinds of survey as they do not tell us the size of the pension schemes involved, and it would be unsafe to use this survey – even if properly randomised – to predict that 58 per cent of DB pensioners have RPI indexation.)

The 1995 Act also makes it very hard for schemes to reduce accrued benefits – and indexing to RPI would be considered an accrued benefit.

Employer organisations and parts of the pensions industry are therefore calling for waht is called a statutory over-ride to be introduced.  This would be a change in the law that effectively rewrote all pension scheme rules so that trustees in future could index their pensions in line with a CPI based LPI measure.

As most DB schemes are now closed to new members, employers cannot say that they will close them if they do not get their way on this.

If ministers agree, it would mean the Government would be introducing a bill that would have no purpose other than reducing future increases in pensions in payment.

I imagine that will go down a bomb on the doorstep of coalition MPs.

2 Responses to Will the government introduce a bill to reduce private sector pensions in payment?

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  2. Bryn Davies
    Jul 25th 2010, 11:42 am

    This must be a real concern. But some clarification was given by Steve Webb, Pensions Minister, in answer to a PQ last week.

    19 July 2010 : Column 4

    Miss Anne Begg (Aberdeen South) (Lab): In a written statement, the Minister said that the Government would force occupational pensions to be linked to the consumer prices index instead of the retail prices index. What powers do they have, or will they have, to take to make that happen?

    Steve Webb: I am grateful to the Chair of the Select Committee on Work and Pensions for her question, as this matter has not been well understood. Statute provides a floor above which occupational pension schemes have to operate. In other words, we will not force occupational pension schemes to cut their increases; we simply provide a floor, which used to be linked to the RPI and is now linked to the CPI. Schemes remain entirely free to go beyond that if they wish.

    Comment: This suggests that the Government are not proposing a statutory override for private sector schemes. However, some schemes set the limit on increases by reference to the statutory cap and this will affect future increases. And even schemes that refer explicitly to the RPI will probably want to change their rules, depending on each scheme’s amendment power.