CPI/RPI Pensions Uprating

Debate between Baroness Clark of Kilwinning and Grahame Morris

Thursday 1st March 2012 Commons Chamber

[Katy Clark]

Of course, firefighters are a relatively well-paid group compared with some of the other groups we are talking about. It might well be that 30% of firefighters do not opt out of the scheme but that they are thinking about it at the moment because they are so concerned about some of the changes being proposed. One point to consider with firefighters and others who work in occupations that rely heavily on physical exertion is that they may not have the choice of working for longer. Paramedics and firefighters have very physical jobs and for them working extra years to pay more into their pension pot is often not a realistic option.

Finally, we need to address the issue in a broader context. I was very interested to hear the comments of the hon. Member for West Worcestershire (Harriett Baldwin). I thought she was absolutely correct when she talked about the serious situation, with so few people having decent pensions to rely on. That is appalling. Her points about the retail prices index and the consumer prices index in relation to pensioners in particular were incredibly important. We know that housing costs are an issue, but council tax is also an issue for pensioners because they spend a far greater proportion of their income on council tax than others in the community. There is merit, then, in the GMB trade union’s suggestion that we consider what it calls a bespoke pensions index. We should perhaps explore that possibility more to compensate accurately and ensure that people enjoy pensions increases that mean that their living standards are not affected in real terms.

I want to make a broader political point about pensions. Many Government Members support this and speak about it regularly: we should be encouraging people to save for their retirement. We should not be encouraging people to have to rely on the state when they retire because their levels of income are so low that they are eligible for welfare benefits. Although we need a decent basic state pension that everybody can afford to live on, we should live in a society in which people are encouraged to save through occupational pension schemes, regardless of whether they work in the private or public sectors.

I was extremely relieved, therefore, that the Government decided to continue with Labour’s legislation on auto-enrolment, which sets out the framework for doing something about the chronic levels of under-pensioning, particularly in the private sector. However, if we keep changing the basis on which people think they are paying into pensions, we will erode faith in the pensions system. Those thinking about auto-enrolment may take that into account when making their decision.

[Grahame M. Morris]

As usual, my hon. Friend is making some excellent and pertinent points, but will she comment on the arguments made by Government Members about this being a more sustainable package? Is not the issue the sustainability of the pensioners themselves—their income and ability to pay their way—and the need to offer them security in retirement? In truth, is there not an alternative—for example, taxing the likes of Vodafone and Barclays, and closing loopholes—if we want to make the public purse more sustainable?

[Katy Clark]

I agree with what my hon. Friend says about tax avoidance and evasion. We should be focusing on that much more. He will be aware that at the moment, while the living standards of those on low and modest incomes are falling in real terms—because pay has been frozen or cut in the public and private sectors and because the cost of food, energy and other commodities on which we all rely is rising so much—those at the top of society are also becoming wealthier. That gap between rich and poor has been escalating over the past two years, which, as a matter of public policy, is to be deeply regretted.

I am concerned that cumulatively the decision to move from RPI to CPI will have a substantial impact on the living standards of many thousands and millions of pensioners in the country. I do not believe that these decisions should be taken for short-term reasons—to balance the books over a short period—and as I have said, I am not convinced that they will work like that. We should be aiming to get cross-party agreement on the need to put in place a framework of financial incentives for people to save and to pay into public and private pension schemes. We need a safety net for those unable to do that, but we must also provide incentives to ensure that we have decent public and private sector pension provision in the future.

--- Later in debate ---

[Grahame M. Morris (Easington) (Lab)]

I am grateful, Madam Deputy Speaker. Thank you very much, indeed.

I congratulate my hon. Friend the Member for Hayes and Harlington (John McDonnell) on securing this important debate and thank the Backbench Business Committee for granting us this opportunity, which has arisen out of an e-petition signed by in excess of 100,000 people.

I have also received many representations from constituents, in letter, in person and by e-mail petition, so I should like to make some points in the debate, and I am grateful for the opportunity to do so. I shall try not to repeat those points that Members on both sides of the House have already made.

There has been a decision to change the index that is used to increase state pensions, public sector pensions and, indeed, large aspects of private sector pensions. In an earlier intervention, the Minister said that the change would not affect private pensions that already have RPI in their terms, but certain private pensions that have a statutory link will be affected, so perhaps he will clarify that point in his final remarks.

My concern—this is based anecdotally on evidence that constituents have presented to me in letter form and in person—is that some members of public service pension schemes might lose up to 25% of their pensions. It is difficult, as the hon. Member for Gloucester (Richard Graham) said, to understand the complexities of RPI against CPI, but my fairly simplistic view is based on what is the bottom line for the people who are affected. I am concerned that many of my constituents, who are not well-paid public sector pensioners, will be adversely affected by the change.

To reinforce the point that the hon. Gentleman made from the Conservative Benches, I note that it seems that the Office for Budget Responsibility underestimated the gap between RPI and CPI by about 100%. When the OBR made its forecast, it said that the difference would be about 0.7%, but it has turned out to be nearer 1.4%. In other words, the switch could cost pensioners in Easington and, indeed, throughout the country, many thousands or even tens of thousands of pounds over their retirement.

I do not believe that it is disputed that the change will save the Treasury and employers with private sector pension schemes billions of pounds, at the expense of those saving for their retirement. In an earlier intervention, I raised an issue that was raised with me by the GMB trade union, which suggests that we look at a bespoke pensions index that might more accurately reflect the cost of living faced by pensioners. When I read the suggestion, I thought that we should look at it a little further, given the controversy raging about which is the correct measure, but in response to an earlier point I must say that the previous Government used CPI as a comparator. I stand to be corrected if need be, but the traditional index that we have used in this country since the 1940s has always been RPI. The previous Government introduced CPI not for pensions but because the measure was used in the European Union and was more readily understood when used as a comparator across other EU states. I would never advocate applying it for the purposes of pension calculation.

[Katy Clark]

I am listening to my hon. Friend with great interest. Does he agree that the British economy and, particularly, British housing costs have traditionally operated in a different way from those of many other parts of Europe? That is one reason why the retail prices index might be a better way of doing things—as other European economies work in a different way.

[Grahame M. Morris]

Absolutely; that is a very good point well made. I am certainly aware, from visits to Germany and elsewhere, that there is a much larger private rental sector in Europe, so it is quite right that we retain RPI, as it takes account of mortgage costs, which are a significant factor for many people.

I support the motion because the change from RPI to CPI means that many people, both those already retired and those yet to retire, will receive less than they were led to expect. As my hon. Friend said in her speech, many of those people have made long-term decisions about their income in retirement, such as to pay off mortgages and other commitments, based on the fact that they would receive a pension that was linked to RPI. Retrospection is unfair, and the House should call on the Government to reintroduce the RPI measure immediately. For a typical firefighter on a full pension this year, the actual cost over 20 years of retirement is between £25,000 and £52,000—that was confirmed in a survey that was carried out by the Fire Brigades Union—and that is because the Government have imposed this measure. I emphasise that these changes have been imposed without any consultation.

The argument that CPI is a more appropriate measure for how pensions should be paid is false. Indeed, all three of the judges in a test case brought by the FBU stated that the move to CPI was merely to do with the desire to force through budget cuts. To pretend otherwise is ridiculous. Government Members are suggesting that it is not about deficit reduction, but it is certainly about budget cuts and placing the burden of those cuts unfairly and unjustly on to pensioners.

[Katy Clark]

On my hon. Friend’s point about the effect on individuals, he will be aware that one of the other changes proposed for many public sector pension schemes is to increase the contribution—the payment—that the individual makes while reducing the percentage that the employer pays. Does he agree that that, combined with the RPI/CPI change, means that employers will be paying less as their part of the contribution towards the pension while the employee is paying more?

[Grahame M. Morris]

That is an excellent point. It is a double whammy.

Research that I have seen shows that between 1989 and 2011, RPI was on average about 0.7% higher than CPI inflation.