Socialist Worker

Sunak’s savage pension attack will snatch tens of thousands of pounds from workers

by Charlie Kimber
Issue No. 2715

Pensions are not a gift but deferred pay - striking back in 2011

Pensions are not a 'gift' but deferred pay - striking back in 2011 (Pic: Guy Smallman)


More than ten million people with pensions linked to their final salary face losing tens of thousands of pounds.

Proposals to change the way annual pension increases are calculated will leave people £30,000 worse off on average.

And the hit could be even greater according to new analysis.

Currently, most people receiving income from “defined benefit”-style pensions in the private sector have annual rises in payments linked to the retail prices index (RPI). This measures the rise in the cost of a pre-determined basket of goods, including housing costs.

But the government doesn’t like the RPI measure. It consistently shows a higher rate of inflation than ministers like to pretend is the case.

The Office for National Statistics has set up a consultation on “reforms” that could see workplace pensions and other benefits rise more slowly each year.

The planned changes would come into force by 2025. They would mean the annual measured rate of inflation would be lower, on average, by 1 percentage point a year, according to the consultation document.

Investment Insight, an asset manager, has calculated the cost of linking defined benefit pension increases to CPIH, or the Consumer Prices Index with Housing costs.

“Investment Insight’s analysis shows that a member of a defined benefit pension scheme who is retiring at age 65 on a starting income of £20,000 could lose in excess of £30,000 over the course of their retirement,” said Rob Gall, head of market strategy at Insight Investment.

“If RPI is simply aligned with CPIH we believe this would significantly reduce the pension fund benefits received by end members.”

Calculations

Barnett Waddingham, an actuarial consultancy, has carried out separate calculations. It said someone aged 50, with an RPI-linked pension paying £10,000 annually from age 60, would have previously expected to receive about£500,000 in total if they lived to the average age of 90.

If the government goes ahead with the proposed changes, the member’s total payments would be cut to around £425,000. “A change to CPI from RPI would benefit those who make payments based on the value of the index—such as pension schemes,” the Institute and Faculty of Actuaries said.

“However, those who receive benefits linked to the value of the index will be more likely to receive lower future benefits. As a result, changes to the measure of inflation used will create winners and losers in all cases, sometimes very unevenly.”

It will be bosses and pension fund executives who win, workers and pensioners who lose.

Inflation uprating for private and public sector defined benefit schemes has traditionally been RPI-linked. But since 2011, public sector pensions have been linked to CPI, an inflation measure that typically rises more slowly than RPI.

However, about 75 percent of Britain’s 5,500 private sector schemes—with more than ten million members – still use RPI to uprate pensions.

The move away from RPI was signalled in chancellor Rishi Sunak’s budget in March this year, having first been advanced a decade ago. After the budget the GMB union said, “These proposals will be a hammer blow for millions of working people and pensioners.

“This might be presented as a technical issue. But if this goes through it will end up costing millions of workers and pensioners their full, hard-earned compensation.

“Turning RPI into a zombified version of the flawed and controversial CPIH measure will drive down many people’s standard of living.”

That was right. It’s time to fight the move.


Click here to subscribe to our daily morning email newsletter 'Breakfast in red'


Mobile users! Don't forget to add Socialist Worker to your home screen.