CPI/RPI Pensions Uprating

Jeremy Corbyn Excerpts

Thursday 1st March 2012 Commons Chamber

[John McDonnell]

The hon. Gentleman is right. Jim did base his future plans with his wife on what he was told was a guarantee—a written guarantee—in the guide itself. That is not just unfortunate, but disgraceful. I agree that others should not be misled in that way in the future, and it should not have happened in the past. Thousands of pounds have been cut from Jim’s own pension. After 35 years of public service, the Government have knowingly cut his pension to pay off a deficit he did not create.

There are so many other Jim Singers. I recently met firefighters who were particularly angry that a firefighter retiring on a full pension will lose £52,000 over 20 years. This comes on top of a three-year pay freeze, after two years of only a 1% increase, which means no real increase in pension or pay for the best part of five years. The real cut in spending power for firefighters is a pre-retirement cut of 20% and a post-retirement cut of 22%. A 40% cut in income is a terrible price to pay for a crisis these people did not create.

I have met so many others, too. A Forestry Commission worker who worked for 24 years is losing £17,000; a jobcentre worker who worked at the Department for Work and Pensions for 26 years is losing £20,000; a tax inspector at Her Majesty’s Revenue and Customs with 36 years’ employment is losing £45,000. I became angry myself when I encountered examples provided by the Forces Pension Society of some horrendous losses—I do not know whether other Members have seen them. A disabled double amputee, a 28-year-old corporal, will lose £587,000 by the age of 70; a 40-year-old sergeant in the Royal Marines will lose £212,000 by the time he is 85; members of the Royal Fleet Auxiliary will lose literally tens of thousands of pounds. This is simply unacceptable.

Why, then, the change from RPI to CPI? In past discussions of this question, the Minister has been robust in his view that whether or not there was a need for cuts to deal with the deficit, CPI is a “better measure of inflation”. Numerous others have contested the suitability of CPI as an appropriate measure for pensions. The Royal Statistical Society is a particular example, and it provided us with another briefing yesterday. Its vice-president, Jill Leyland stated forcefully in a letter to the chair of the UK Statistics Authority:

“We do not feel that CPI currently serves the purpose of being a sufficiently good measure of price inflation as experienced by households to be used in uprating pensions”.

She went on to warn that its use would

“cause damage to consumer confidence in official statistics if it is perceived that uprating to pensions and other benefits is being governed by an index perceived by many as inappropriate and unfair.”

It was reiterated in the briefing sent to all Members yesterday that it is important for any index to enjoy the confidence of pensioners—and this index does not.

CPI was invented as a tool of macro-economic policy so that inflation rates could be compared across Europe, but because there was no agreement on how to calculate housing costs across European countries, that element was left out. CPI, because of its exclusion of housing costs, such as mortgages, council tax, and vehicle excise duty and TV licences, is criticised for not properly representing the real costs that pensioners face.

On top of that, as Members will know from the previous debate, there is what is described as the formula effect. CPI uses a geometric mean rather than an arithmetic mean, and we have long debates about those different means, so we have all become statisticians on this issue. In its calculations, CPI is supposed to take into account the ability of a person to shop around for cheaper goods. This—falsely in the eyes of many statisticians—assumes a sophisticated knowledge by pensioners of price variations and that consumers are sufficiently mobile to shop around. In reality, many pensioners are not the perfect shoppers of the economic model that CPI puts forward and are not mobile enough or capable of shopping around to secure the lowest price of all the goods in this basket.

[Jeremy Corbyn (Islington North) (Lab)]

I commend my hon. Friend for securing this motion. He makes the point that housing is excluded from the CPI. Particularly in London, house prices, rents and housing costs are going up well above the rate of inflation, and continue to do so. For elderly people, it is impossible to shop around: they have no choice; they have to stay where they are in the property they occupy, and they have no control over rents and associated costs. It is a double whammy on them.

[John McDonnell]

That is why—[Interruption.] As the Minister says from a sedentary position, it is mortgage costs, not rents that are excluded. However, the range of other costs that pensioners have to meet are not included—housing-associated costs such as council tax, for example. That is one reason why Age UK undertook detailed research into the real spending patterns of pensioners and arrived at a more realistic assessment in its “silver retail prices index” of what price rises pensioners face. That showed that the impact of increases in basics such as fuel costs and food were hitting pensioners harder than both the RPI and the CPI calculated.

The weaknesses of CPI have been extensively acknowledged. The EUROSTAT—the European Commission’s statistics body, which came up with the original proposals on CPI—is working on a harmonised approach to including housing costs. The Minister acknowledged some of these criticisms in the Welfare Reform Bill Committee and informed us that the Consumer Prices Advisory Committee is undertaking a detailed programme of work to look at ways of including housing costs, but that this would not be concluded in the next “year or two”. In the meantime, pensioners will lose out—significantly.

Despite all the debate about the statistics, we know that the real reason for the move from RPI to CPI is to cut public expenditure. When this matter came before the courts, the Government argued that CPI

“provides a more appropriate measure of benefit and pension recipients’ inflation experiences than RPI and a better representation of the way consumers change their consumption patterns in response to price changes.”

They argued that that was the reason for the shift. Three High Court judges agreed that, on the basis of the facts before them, the Government’s move to CPI was really the result of their desire to force through budget cuts.

--- Later in debate ---

[Harriett Baldwin (West Worcestershire) (Con)]

Thank you for allowing me to speak in this important debate, Madam Deputy Speaker. I congratulate the hon. Member for Hayes and Harlington (John McDonnell) and the Backbench Business Committee on organising the provision of parliamentary time for discussion of this topic. Having been a professional pension fund manager myself, I leapt at the opportunity to speak today. It is not often that, on a Thursday afternoon, we experience the excitement of discussing the difference between the geometric and the arithmetic mean in indexing. I thought I would put in a few words, as I also represent a constituency that is inhabited by a higher than average number of pensioners.

As a former pension fund manager, I recall the days when Britain had a pension fund system that was the envy of the world. We had a terrific private sector-led system, and workers in the public sector were also in very good schemes. I believe that Britain’s leadership in that regard began to unravel in the first Labour Budget after the general election in 1997, when the then Chancellor imposed a tax on pension schemes. It was pretty apparent at the time that that would undermine a private sector pension system which, as I have said, used to be the envy of the world.

[Jeremy Corbyn]

I think the hon. Lady is in danger of misreading history. The Social Security Act 1986 promoted the destruction of occupational pension schemes, promoted personal private pension schemes, and eventually led to a gross mis-selling of pensions which had to be corrected by the incoming Government in 1997. I think the hon. Lady needs to take her historical narrative a little further back.

[Harriett Baldwin]

The hon. Gentleman has clearly forgotten the imposition of a tax on private pension schemes in that first Labour Budget of 1997, which I think many people realised at the time would be a recurrent year-on-year tax that would lead to the erosion of private pension funding over time. Private companies then acted very rationally. Many of them ceased to offer defined benefit pension schemes.

Let me give some figures which I take to be rough estimates. There are approximately 29 million people in Britain’s work force today, 23 million of whom are employed in the private sector. I was shocked to learn that only 3.2 million of those 23 million were currently active members of a pension scheme in which the employer makes any contribution. That contrasts with the position in the public sector, in which about 5.5 million of the 6 million employees are members of pension schemes. That is the proportion that we should aspire to in terms of pension provision throughout the work force. I know that our pensions Minister aspires very much towards movement in that direction.