Monday, 23 August 2010

The Great Pensions Robbery

The Conservative/Lib Dem coalition government have announced that all public sector pensions will in the future, be increased annually by the percentage figure as measured by the Consumer Prices Index (CPI), rather than has been the case for nearly 100 years, by the Retail Prices Index (RPI). It also seems that private sector pensions which have previously risen in line with RPI, will be allowed to move to the CPI measure.

The RPI and CPI have different ways of calculating the rate of inflation in the UK economy. They calculate inflation by using a ‘basket’ of products and services and tracking the price changes in these commodities, but the CPI uses a larger sample than the RPI . Crucially though, the CPI excludes housing costs, which by anyone’s definition is surely an essential indicator of the cost of living? Also, the CPI excludes rises in Council Tax, which is something that we all have to pay.

You can see from the diagram above, that for the past 21 years the CPI has invariably been running below the RPI rate, on average by about 2%, except in the early 1990’s and the current recession. The periods where CPI has run ahead of the RPI can be largely explained by collapsing house prices which has occurred in the last two recessions. When the economy has been growing, CPI has always been below RPI, and instead the talk was of a separate ‘house price inflation’, as though that was somehow a special case, when in truth it was what was growing the economy in the first place.

What all this represents, is a proposal to cut the amount of pension increase for everyone either paying into these pension schemes, when they come to retire, and for those drawing these pensions now.

The vast majority of people in these schemes are on modest incomes, which will over time become even more modest. Welcome to another chapter in the coalition government’s determination to make those least to blame and least able to pay, foot the bill for the present economic crisis.

There is though hope, that this proposal can be stopped in its tracks. The trade unions will be against it, as will pensioners groups, and there must be millions of people in pension schemes like these, both in public and private sector employment, as well as those who are now retired. We should remember, that at the time of the pension agreements being drawn up and agreed upon, it was a central point, that RPI would be used to calculate inflationary increases in the pensions. This was a contract made in good faith by members of pension schemes, and the present government wants to break that contract, which is grossly unfair. If people had known that they would be ripped off like this at the time, they might have made different financial choices.

A huge amount of people could be mobilised against the change to CPI, probably larger than that gathered for the successful challenge to the Poll Tax in the 1990’s which spelled the end for Margaret Thatcher as Prime Minister. Could this attack on pensions see the back of David Cameron as Prime Minister? It certainly has the potential.

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