CPI/RPI Pensions Uprating

David Crausby Excerpts

Thursday 1st March 2012 Commons Chamber

[Mr David Crausby (Bolton North East) (Lab)]

Despite all the detailed arguments about geometric or arithmetical calculations, the reality is that CPI will pay out less than RPI. Even the Treasury calculates that the difference between the two measures is 0.5% per annum, and my hon. Friend the Member for Hayes and Harlington (John McDonnell) revealed some even more disturbing figures. That difference explains why the Government have changed the measure without consultation or negotiation. They have done so to cut both their costs and the earnings of those who will be affected. This is not an efficiency measure that will benefit us all; it is simply transferring money from poor pensioners to the Government or to private pension schemes.

Although I abhor any reduction in the earnings of poorly paid workers, I accept that it is perfectly legitimate for an employer or the Government to argue that a change in their financial circumstances means they simply cannot afford to continue to pay the same levels of remuneration. In turn, the employee, either individually or through their trade union, is then entitled in any free society to make a decision on whether they are going to accept that reduction in pay or seek employment elsewhere—or look for a different pension scheme.

That is why I believe that this issue of changing the payment of pensions should be dealt with in two parts: the future should be dealt with differently from the past. It is one thing to say that any pension earned from now on will be dealt with by indexing it to CPI, but to say that the arrangement will cover the whole of someone’s pension life is another. It reminds me of the story of the young, inexperienced trade union representative who called his members to a meeting to announce that he had met their employer and had good news and bad news to report. He informed them that the bad news was that he had been forced to accept a pay cut on their behalf. When asked what the good news was, he said that he had managed to get it backdated.

It should be a fundamental principle that employees should be aware of what their pension will pay when they qualify for it, because they will, thus, be able to make an objective decision about whether they should pay in and be part of the scheme. Pensions, once earned, are like earnings: they are the property of the individual and not the property of the employer or the Government. The employer and the Government should just be custodians of the pensioners’ invested money, and they should look after it prudently and honestly. Pensions are deferred wages, and backdating a pension cut is like backdating a wage cut—it is ridiculously unfair. In these circumstances, it is little wonder that working people are suspicious about saving up for their pension.

[Grahame M. Morris]

Does my hon. Friend acknowledge that if we attempt to balance the books on the backs of future pensions payouts, as the Government are proposing to do, there is a danger that people will simply opt out of pensions provision, particularly in the private sector, and therefore the cost that falls on the state and the taxpayer in the long run might actually be more? So this measure is a false economy.

[Mr Crausby]

I have always believed that this is principally a matter of trust between employees and employers, be they private employers or the Government, and so I agree with my hon. Friend.

I have represented poorly paid working people all my life, and my sympathy lies with those who come to my surgery to tell me, “I’ve worked hard all my life and saved what I could, but now I am retired I wonder why I bothered because I am no better off than those who didn’t work and saved nothing.” I rarely agree with that argument, because the truth is that they are nearly always better off than they think they are as a result of their prudence, and their neighbours who live on benefits are usually worse off than they are perceived to be, although I must say that sometimes it is very close to the margin. The Government’s decision to cut pensions arbitrarily by linking them to the inferior CPI encourages that prejudice, and it will persuade poorly paid people to save their money in a different and less sensible way.

[The Minister of State, Department for Work and Pensions (Steve Webb)]

The hon. Gentleman makes an important point about pension promises being kept. Will he confirm that he is aware that all his constituents who worked for a company whose pension rules entitled them, in writing, to RPI increases still have that right and have not been affected by anything we have done?

[Mr Crausby]

I accept that that is the situation on their pension fund, as long as those individuals can trust those private pension schemes to continue to pay; I have to say that during my working lifetime that has not always been a very happy experience when it comes to private pension schemes.

My principal argument is against the Government’s decision to make savings at the expense of our pensioners by using CPI rather than RPI. Of course this is not the first time a Government have behaved in this way, as the Conservatives have a track record of not treating pensioners properly. Margaret Thatcher’s decision to make a change on the link with earnings has cost pensioners across the country many thousands of pounds. The harsh truth is that the public just cannot trust the Government any more than they can trust their employers, and I find that very sad. It is not in the best interests of our country.

[Richard Graham (Gloucester) (Con)]

If the hon. Gentleman and others of his colleagues were so concerned about the decision made by the previous Conservative Government to separate pensions uplift from earnings, why did his party do nothing about it for the 13 years it was in power?

[Mr Crausby]

The previous Labour Government did decide to restore the link and were committed to doing so. The current Government have now restored the link at a time when wages are flatlining, and the reality is that the restoration has cost them not a penny. But the real issue is not the restoration of the link, but the many thousands of pounds that will have been lost by our pensioners until the day they die since Margaret Thatcher broke the link in the first place.

[Katy Clark]

I would have liked the Labour Government to have restored the link in 1997. I do not really understand why they did not do so, because the increases that were given were greater than they would have been had the link been restored. Does my hon. Friend accept that?

[Mr Crausby]

I completely accept that. I do not recall any of the political parties demanding that the Government of the day in 1997 restore the link. I am not making my argument on a party political basis; I am trying to make some principled arguments about how Governments should behave towards pensioners in the longer term. I completely accept that when I criticise how the Government deal with pensioners, that reflects on a series of Governments whose actions have resulted in many of my constituents not trusting in pensions at all.

That is why I make the point that the public cannot trust the Government on pensions in the long term any more than they can trust their employers. So many employers took large pension contribution holidays in the good times and then argued when more difficult times arrived that they just could not afford to pay the increased cost, and I am sorry to say that the Government—this Government are proving this—behave in exactly the same way, the only difference being that when the Government renege on a pension deal they call it legal. When Robert Maxwell absconded with the Daily Mirror pension fund he was, properly, castigated as a villain, but when compared with the behaviour of a series of Governments he was a paragon of virtue. Their behaviour is partly accounted for by the fact that, in the main, we have no accumulated pension funds, with one generation of taxpayers paying the previous generation of pensioners. Prime Ministers and Chancellors of the Exchequer find it difficult to resist the temptation to renege on the promises made by the politicians who went before them. Whatever the reason, they should be ashamed of themselves because when they do that they are no better than an employer who just runs off with the pension scheme.

[John McDonnell]

In the representations that I have received, even when there is a pension fund, as with the teachers’ scheme, when they are desperately seeking revaluation and when it seems completely sustainable, members of the pension fund cannot understand the increased contributions and the shift from RPI to CPI. The accusation that is being made goes to the heart of my hon. Friend’s point about trust. These people feel that they have been mis-sold a pension scheme based on the information they were given by successive Governments about what they would receive in the end.

[Mr Crausby]

I think that members of the public have been mis-sold pension schemes over a generation by a series of Governments. It is about time that this House instructed its leadership to behave decently to pensioners. That is why I am trying to make the principled point that one Government should stick by the promises made by previous Governments. To effectively backdate the reduction in an individual’s pension throughout their entire life through this move on RPI and CPI must be completely unacceptable—[Interruption.]

[Madam Deputy Speaker (Dawn Primarolo)]

Order. I was waiting for Members to stand. I call Stephen Lloyd.

--- Later in debate ---

[Mr Crausby]

Regardless of the legal judgment, does the Minister not accept that any reduction in pension—clearly the move from RPI to CPI creates a reduction, and it is backdated—is simply a clear breach of trust?

[Steve Webb]

Let me deal with the issue of backdating, as the hon. Gentleman has used that term. People’s pensions are revalued from the point at which they cease to work for the company until they retire and then indexed once the pension is drawn. The revaluation has not been backdated. In other words, all the revaluation up to the date of the change which used RPI will still use RPI, so there was no backdating of any of that. It is future revaluations that will use CPI. Furthermore, the right to indexation cannot exist until a person draws their pension. They build up a pension, and when they draw it they have a right to have it indexed. We have defined indexation according to what we think is a better measure of indexation. The right to indexation existed all the way through, and continues. The law has always been that the Secretary of State of the day has to measure inflation in an appropriate manner, and that is what we have done.

[Mr Crausby]

Is the Minister saying that at any point in the future he can decide what the measure of inflation is and then refer it back to the whole of an individual’s pension? Is he not seeing this just as a matter of his judgment at any point in time, in effect producing an index very much lower than the expected one?

[Steve Webb]

No. What I am saying is that the law of the land requires the Secretary of State to make an assessment of the increase in the general price level each year. If the Secretary of State were to make such an assessment in a flippant way, by coming up with the first low number that he thought of because it suited him to do so, he would soon find himself in the High Court, and rightly so. That is not what is being done.

The Secretary of State has chosen a measure of inflation that is internationally standardised and used by the Bank of England for macro-economic targeting, and that better reflects the spending patterns of pensioners. One of the big differences between CPI and RPI in regard to the basket of goods is that the CPI does not include mortgage interest. It is worth pointing out that only 8% of pensioners have a mortgage. Why would we insist on using a basket that gives huge weight to mortgages for a population that hardly ever has a mortgage?

My hon. Friend the Member for West Worcestershire (Harriett Baldwin) mentioned in her excellent speech that in the year to September 2009 the RPI was negative, not because pensioners’ living costs had fallen but because something that most pensioners did not have— mortgages—had got a lot cheaper. Does the hon. Member for Hayes and Harlington really think that in the year to September 2009 the RPI was giving an accurate measure of the cost of living of pensioners? I am sure he does not. It was negative, but I am sure he would not say that that was because pensioners’ living costs were falling; they were not, but the index suggested that they were, because it was using the wrong basket of goods.

There is a second difference between CPI and RPI. As my hon. Friend the Member for Gloucester (Richard Graham) said, in addition to the basket of goods being different, the way in which people are deemed to respond to price changes is different. That is called the formula effect, and in general it is the bigger difference between the two. On that point, the Institute for Fiscal Studies has said that this was a sound basis for the change that we made because it better captures the way in which people on lower incomes respond to price changes. It has been suggested during the debate that pensioners do not shop around, but my experience tells me that they do. In the shops, for example, they will choose between a branded product and an own-brand product. I think that most pensioners are pretty canny. They are the most likely to shop around, and that is the way in which the CPI is constructed.

It has been suggested that the switch to CPI was purely a cost-saving measure that was dreamt up post-election. I have been reading through the evidence given to the court, and the judgment, and I found out something quite startling about what was happening in the Treasury before the last general election. In 2009, the Treasury was considering whether CPI was the best measure to use. The court judgment refers to a senior Treasury official, Dr Richardson. It states:

“Dr Richardson confirmed that the Treasury also considered that CPI was superior for…all benefits, tax credits and public service pensions. The Treasury had reached the same conclusion that ‘CPI provides a fairer reflection of inflation experience than RPI over the longer term…’ Dr Richardson also stated in 2009—that is, even before the 2010 election—once it had become widely anticipated that RPI inflation to September 2009 would be negative, the Treasury had formed the view that a move to CPI would ‘better reflect the experience of those affected by up-rating measures’”.

Now, the Treasury had decided before the last election that CPI was a better measure, so why did it not implement it? Because in that year, CPI was higher. In other words, on methodological grounds the Treasury had decided before the last election—I think the right hon. Member for East Ham (Stephen Timms) was a Treasury Minister around that time—that CPI was a better measure, but it held off from implementing it because it would have cost money. We think the CPI is a better measure, and we implemented it after the election, following a period when the RPI was clearly misrepresenting pensioner living costs—and I believe that to have been the right thing to do.

There was some discussion about whether the judges said that the change was just about cuts—I think it was the hon. Member for Easington (Grahame M. Morris) who suggested that it was. Let me quote him paragraph 63 of the court judgment:

“In our judgment, the evidence from Mr Cunniffe and Dr Richardson”—

the civil servants—

“set out above makes it plain that both the Secretary of State and the Chancellor independently came to the view that the CPI scheme better reflected the effect of inflation on the spending power of benefits and pensions, for a variety of reasons quite independently of cost.”

That was the majority view of the judges. Even if the hon. Gentleman does not want to take my word for it, the High Court looked at it independently, with no locus to defend the Government, and judged that a range of factors was in play. Clearly, the fiscal context was important to the decision—no one is pretending it was not—but the most appropriate index, CPI, was chosen by the Government, which is the one we went ahead with.

The position of the official Opposition and the Labour party pension scheme have been discussed, and the shadow Minister, the hon. Member for Cumbernauld, Kilsyth and Kirkintilloch East (Gregg McClymont), said that the Labour party could not support the move to CPI. What is not clear to me is whether it can oppose it. A week ago, we talked about CPI and RPI in relation to an uprating order. Shadow Ministers made their trenchant criticisms of our policy, but when the vote came they walked away. After the contribution of the shadow Minister today, I am a little hazy about whether he is going to walk away again today. I think the trade unions would want Labour MPs to back the motion, but my impression is that whereas Labour Back Benchers will back it, Labour Front Benchers will be busy when the Division comes. I am of course happy to give way if I am misrepresenting the position of the official Labour party.

Important issues were raised in the debate. One of the key ones was the impact on individuals. In a sincere and well-informed contribution, the hon. Member for North Ayrshire and Arran (Katy Clark) listed particular groups of people she was worried about: women, low-paid workers who retire on low occupational pensions, NHS pensioners, and the average occupational pensioner. We have estimated the impact of the CPI change along with the impact of our triple lock. The hon. Lady accepts that the triple lock helps people and the CPI change reduces people’s incomes on average. She gave three examples: people on pensions of about £2,000, £3,000 and £4,000. We estimate that in all three of those examples, people will gain more from the triple lock than they lose from CPI. The very people she is most concerned about will, on average, benefit from what the Government have done on indexation.

My hon. Friend the Member for Eastbourne (Stephen Lloyd) asked about the £13,000. To be absolutely clear, what we are saying is that if people retire this year on a full pension, the change to the triple lock compared with RPI will provide a cumulative £13,000 extra on average over the course of their retirement. Even if we strip out the CPI effect, people will, on average, be £6,000 better off because of the combined changes we have made. I should say—I thought the House would want to know—what would have happened if the triple lock had been applied by the last Government back to 1997. If that had been the case, we would now have a pension nearly £10 a week higher than the current one. We heard in the debate that the last Labour Government kept meaning to restore the earnings link but they just never quite got round to it. If our policy had been in place, we would now have a pension £10 higher to start with, on which to build subsequently.

It is clear that there are gainers and losers from these changes. The gainers are average pensioners with average occupational pensions. It is true that the highest earners with the very largest occupational pensions will lose more from CPI than they gain, but I thought the Labour party was a progressive party that would welcome our protection of the most vulnerable. That is what we have done.

I welcome the fact that 100,000 people wanted this debate. It is a debate that we are willing to have. We accept that these changes have a big impact, but they should be seen in the context of, for example, the triple lock, which will mean that the average pensioner benefits from our policies. These are significant and important changes. We believe that we are measuring inflation properly and appropriately, and we believe that we have protected people through the triple lock. That is a combination that I urge the House to support.