New inflation rules create pension 'lottery'

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The UK government’s unilateral move to link pensions by law to a less generous rate of inflation has been branded a “small-print lottery” as tens of thousands of former public sector staff face benefit cuts while others will enjoy more generous payouts.

The situation is particularly acute at British Airways, where three trustees of the airline’s £6.4bn Airways Pension Scheme have resigned in the past month over the issue. BA’s pensioners want the decision to change the inflation rate reviewed by the High Court.

Clifford Pocock, one of the outgoing trustees, believes the government has created huge problems for schemes by failing to consult on the changes before making its decision. When chancellor of the exchequer George Osborne and pensions minister Steve Webb announced the switch last summer, it took the industry by surprise.

Pocock said: “This is a direct consequence of government policy made on the hoof. The complexity of the pensions issue would have been apparent to the government had it paused to consult prior to taking precipitate action.”

Last August, the government said it would in future increase public sector pensions in line with the consumer prices index rather than the retail prices index. On average, the CPI rises about 0.7 percentage points a year less than the RPI because it excludes housing costs. The government says this is more appropriate because pensioners typically own their own homes.

Rachel Reeves, shadow pensions minister, said: “The switch to CPI has had different effects on different schemes. It is not clear that the government considered the impact on these schemes when deciding to uprate pensions and benefits according to the CPI.”

The change also affects the minimum standards that apply to private sector schemes. But Pocock estimates about 60% of retirees in the private sector are protected by legally binding promises to pay RPI. However, some private schemes automatically follow the statutory rate, which is now CPI.

Chief among them are some of the large ex-public sector schemes, including BT, the Royal Mail Pension Plan and the Railways Pension Scheme. These are some of the biggest funds in the country, with tens of thousands of members. The Royal Ordnance Pension Scheme, which is now sponsored by defence giant BAE Systems, is also affected.

But other ex-public sector funds for power industry workers, coalminers and steelworkers are continuing to pay out in line with RPI. This means that while pensioners of the Electricity Supply Pension Scheme were granted a 4.6% increase in their pension this month; former railway workers got just 3.1% extra.

Jerome Melcer, a partner at pensions advisory firm Lane Clark & Peacock, said: “It’s a mess; it’s a ‘small-print lottery’. People have written their pension scheme rules with one intention, and then the government has changed the legislation and there are all sorts of unintended consequences.”

A spokeswoman for the Department for Work and Pensions said: “We have always recognised the impact of the decision to use CPI as the measure of inflation for statutory increases will depend on the circumstances of the individual scheme, because rules on pension increases vary so much. This is true not just of former public service schemes.”

In December, five months after the policy was first announced, the government began a consultation on the CPI change. The government also made it clear it was not proposing to override private sector scheme rules, or make it easier for schemes to change their existing rules. The spokeswoman said: “We will be responding to this consultation in due course.”

In some cases, there are even discrepancies within schemes. At the Royal Mail Pension Plan, for example, staff who joined before 1987 could face a move to CPI, but different rules apply to those who joined after that date, meaning they are guaranteed RPI increases.

The CPI shift offers some companies the prospect of saving substantial sums. BT told the market last November that it expects to save £3bn from its £40bn pensions liability as a result of the change. BAE Systems said in February that it will save £350m. But the UK’s electricity companies – privatised in the 1980s like BT and BA – will be able to make no such savings.

The state-owned BBC will also stick with RPI, while other public sector pensions switch to CPI. This has caused fury among unions, which have begun legal action to seek a judicial review of the original CPI decision.

Brendan Barber, general secretary of the Trades Union Congress, said the move had led to “chaos and inconsistency” in private sector schemes.

He said: “Some employers are keen to cut their costs. But trustees are in a very difficult position with a new official inflation measure that few believe makes sense. Pension scheme members now face a real lottery with some keeping RPI, but others losing out on an arbitrary basis.”