Here's what Steve Webb actually said.
As far as I can make out, having read that and the relevant bits of the Pensions Schemes Act 1993, the change from indexing up accrued pensions by RPI inflation to indexing it up by CPI inflation only affects people whose pension scheme doesn't have an express agreement to use a higher figure. As background, CPI inflation tends to be slightly lower than RPI.
The Daily Mail has grasped the wrong end of the stick and said that pensions being paid out will only be indexed up by CPI and not RPI, and publish a little table showing comparatives. This is even further from the truth - when you retire, you usually buy an annuity, and you have a completely separate contract with the annuity company stating if and how any annual increases will be calculated, this is not covered by the changes.
More importantly, the changes will affect primarily people whose pension fund had to be bailed out by the Pension Protection Fund, which is effectively a tax on well-funded schemes to bail out badly-funded ones and as such ought to be shut down pronto. If you are receiving a pension from the PPF then I'd stop complaining if I were you*.
And finally, this is all just Blue Socialism. What's good for the employer is bad for the employee and vice versa. So proper capitalists, who don't trust pensions industry rent seekers, and who do the decent thing and buy shares directly, will probably find themselves slightly better off.
Please correct me if I am wrong, maybe there is more to it than meets the eye.
* UPDATE: See Lola's subsequent post. His point 5 seems to support this interpretation.
Saturday, 10 July 2010
Private pension hysteria
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9 comments:
when you retire, you usually buy an annuity, and you have a completely separate contract with the annuity company stating if and how any annual increases will be calculated, this is not covered by the changes.
Not so for people in defined-benefit occupational pension schemes, where the scheme rules will define how the pension is uprated.
C, true, but the PSA 1993 does not override scheme rules if they offer a more generous uprating - they merely say that for a pension scheme to qualify it must uprate accrued benefits by at least a minimum of 'inflation'.
You may have got the first order issue right, but there's bound to be more to it, if only in the detail. How about the GMP bit for instance?
Declaration of interest: my occupational scheme is considering whether to replace its RPI linking by CPI linking (boo!!) and, even worse, capping that at 5% p.a. (double expletive boo!!!!!).
I think most occupational schemes have been capped at 5% for some time now. Which is another good argument against those who claim that inflating our way out of deficit would be a good idea.
D, what's GMP? For your ex-employer to change the rules retrospectively is of course wrong, no dispute there. See also my reply to C.
C, the 5% cap is in fact in the legislation as a default. Schedule 3 of PSA 1993 says that the Sec of State shall decide what the appropriate measure of inflation for uprating is, and that the annual increase shall be no more than the 'maximum rate' which in turn is set at 5%.
As to 'inflating our way out of debt', that's an idea cooked up by the Home-Owner-Ists, many of whom are pensioners, so a fight between two factions of the Home-Owner-Ists is a fight that I'd like both sides to lose.
GMP = guaranteed minimum pension, which has something arcane to do with the diverting of part of your NICS to your Pension Scheme instead of the maw of government. Then, of course, there's the ballsaching bit where your occupational pension is reduced by a bit because you get a bit of SSP/SERP with your OAP. Or some such bollocks. Dear God, it would almost be worthwhile tholing all the pain if only the whole shitty mess were simplified. As distinct, as very distinct indeed, from Brown's "Pension Simplification".
Or even - and this is where you and I have agreed in the past Mark - if Pension Schemes were scrapped and the heretofore employers' contributions handed to the employee as pay. He'd also no longer hand over his employee's contribution. The down side - for Mark - would be that youngsters could then get bigger mortgages and so house prices would leap up.
D, ta for explanation on GMP. I thought that contracting-out would rear its ugly head.
As to simplification, that's easy. We decide how much taxpayer-funded, universal, non-means tested and non-taxable flat rate Citizen's Pension every UK resident over a certain age should get, and that is the end of that. All the other rules get binned, from tax relief to Pensions Credit to contracting out - what's left over gets used to cut taxes generally.
As to your last comment, that supports my view that while income tax cuts are always to be welcomed, they have the tendency to feed through into higher house prices - and there's a simple way to sort that out, of course :-)
Dearieme/mw.
Don't even go there on the complexities of GMP/Protected Rights and all the rest of it. Brown/New Labour enacted a 'Pensions Simplification' bill. You can guess the consequences of that.........
From what I can see on the GMP angle, it's not actually that complex, but it does sound like they're trying to save a bit of money.
GMP pensions are divided into GMP accrued prior to 6 April 1988 and GMP accrued from 6 April 1988. From the point of view of the occupational pension scheme, the pre 88 GMP receives no increases in payment and the post 88 GMP is capped at 3% increase.
The reason for this is that the government pays any increase on your pre 88 GMP and for all increases above 3% on your post 88 GMP, adding an amount to your state pension equal to the increase that you should have received (see here for a quick explanation of how this works).
Most occupational schemes probably say "the lesser of 5% and RPI" for normal increases in deferment, but there will undoubtedly be some that are worded so that they only have to pay the legal minimum.
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