Protecting pensioners from inflation – can we do it better?
There are, as the saying goes, lies damned lies and statistics - and no more so than in the murky world of price indices. As we know the baskets of goods and services that comprise the Retail Price Index (RPI) and the Consumer Price Index (CPI) are different which, hardly surprisingly, means that the results produced once the computers have whirled are different as well. Over time RPI increases are higher than CPI for this reason which is, of course, why governments favour the latter for index-linked benefits. Which brings us to pensions.
Earlier this year those pensioners whose annual increment is based on RPI were spared the threatened recalculation of RPI that would have moved it closer to CPI (i.e. reduced the level of the annual increment in most years). This was welcome but it should not disguise the fact that as true measures of real pensioner inflation neither RPI nor CPI are accurate. They are both too low. Various attempts have been made over the years to measure pensioner inflation and without exception these show higher annual increases than the two main indices. In the main those of us who rely on our occupational pensions to look after us in old (or older!) age have got poorer over the past 10 years or so. This is strongly influenced, for some, by the fact that even where within a DB scheme there is the flexibility in any one year to grant an increment higher than their obligated percentage (e.g. RPI) few of them have done this.
One of the challenges for a trustee is to weigh up the sometimes competing claims of the different classes of membership of the fund. This applies on both the asset side and the liabilities side of the funding ratio calculation. A greater than RPI increase for those with pensions in payment is obviously in the interest of these fund members. But because there is a cumulative effect to such an increase the cost to the fund continues into the future. And that could be seen not to be in the interests of those members yet to receive their pensions (active and deferred) - nor, of course, of the fund sponsor. But if trustees and sponsors could think out of the box other possibilities might occur to them.
Say that trustees are concerned that over the last 10 years the purchasing power of the pensions they pay has been eroded. There is nothing to stop some funds making an award in excess of RPI to a lower pension group whilst sticking with RPI for the remainder. Clearly there is an arbitrariness to this - what would the cut-off point be and what about those whose pensions are low because they had short service? But that should not mean that it should not be considered.
The rules of trust deeds were established in many cases in a different era from today. It seems to me that these rules should never be regarded as holy writ and if there is something in them that seems inequitable given the societal and other changes that have occurred since the deed was first devised then why not change it? Indeed this has happened to most long-standing funds where the current deed is often very different from the original. In the fund of which I am a trustee the deed originally specified that when a pensioner started to receive the state pension the amount he or she received would be deducted from his occupational pension (the so-called ‘state pension deduction’). Many years ago now trustees and the sponsor (to their great credit) agreed to remove this deduction. With one action the total annual pension receipts of all pensioners was enhanced - something that was of course of special value to poorer pensioners. It was a truly progressive change.
In the light of the changes of the last few years - scheme closures, the freezing of pensions consequent on stopping accrual for actives, even the changing of indexation in some funds (RPI to CPI) - it may seem fanciful to propose the improvement of benefits. Clearly if times were more propitious and the funding ratio of your fund was more positive then you have a stronger case to make! Or at least a better chance that you will be listened to. Nevertheless it is sometimes necessary to reflect that if your fund claims that the real value of pensions in payment will be maintained it is unlikely that over the past decade that this has happened.
Paddy Briggs is a member nominated trustee director of the Shell Contributory Pension Fund. He writes in a personal capacity and the views he expresses are his own.
