Broadstone claims that wider use of flawed measure of inflation is a “national scandal”
Government action on British Steel pension scheme should be applied to all schemes.
The Government has announced today that it is consulting on changing the way pension increases in the British Steel Pension Scheme are calculated. Instead of using the old RPI inflation index, the Government is proposing to force the scheme to use CPI. Whilst this sounds like a rather geeky technical change, CPI is expected to be around 1%pa lower than RPI, and as a result the change will slash up to £1bn from the scheme’s total liabilities, and at a stroke would probably turn the scheme deficit into a surplus.
Commenting on the announcement, John Broome Saunders, pensions consultant at Broadstone, said: “It seems grossly unfair that, for political expediency, the Government gets to bend the rules for the British Steel Pension Scheme, but takes no action to benefit the thousands of other companies who are struggling to fund pension schemes. Many of these continue to have to calculate increases linked to the old, flawed RPI index, despite the fact that it is universally accepted that the RPI fails to meet proper statistical standards, and almost always overstates price inflation. Scheme members are in no position to complain – anybody who contributed to a final salary pension scheme has essentially won the lottery, as their benefits from that scheme will almost certainly be significantly more valuable than they would have expected when they were contributing to the scheme. Giving members what amounts to a 10% bonus by continuing to calculate pension increases in a way that does not reflect true price inflation is nothing short of a national scandal.
Broome Saunders believes that the Government needs to take swift and decisive action. “The Government should force all schemes to use CPI as their measure of inflation. At a stoke this could halve the deficit of many final salary schemes. This would reduce the deficit contributions that employers need to pump into these legacy schemes, allowing employers to spend money on investing in their business, creating jobs, and, perhaps most importantly, increasing pension contributions for current employees.
“The Government’s consultation on the use of inflation in the uprating of pension benefits in final salary schemes will be music to the ears of Finance Directors across the land. The news this morning may have them shushing their children as they strain to listen to the Government’s idea to reduce the costs in a private sector pension scheme by switching to a lower rate of inflation. If the Government is successful (and it could be a big if) it would open the door for other employers sponsoring schemes using RPI to the opportunity of reducing the size of the scheme’s benefit promises.”