Three pension funds took the Treasury to the High Court over changes to the retail price index and yesterday they lost.
What this means to the schemes is that a lot of RPI linked gilts (linkers) will pay out less than the schemes had expected before the Treasury changed the rules.
The Treasury changed the rules because they felt they could and because the world has changed. As Reuters puts it , in reporting on yesterday’s ruling
RPI, which dates back to the 1940s and is regarded by official statisticians as inaccurate and obsolete, remains the benchmark for inflation-linked British government bonds that are commonly held by pension funds.
So the pension schemes will be worse off and the Treasury will be better off. It’s not just these big three schemes, it’s all the pension schemes that own “linkers” and that means less security for people in DB plans – not a lot less – but the change is significant. The security that members have is in the likes of BT, M&S and Ford picking up the tab for the downgrade in the value of their assets. The FT reports the scale of the tab as between £90-£100bn (over time).
But this is largely offset by the reduction to scheme liabilities where schemes are promising to pay RPI linked benefits. Where the promise to pay all of part of a pension is linked to RPI rather than CPI, then the changes are likely to mean pensions in payment from 2030 (when the changes come in ) will be lower. This will effect a large number of DB pensioners who are still alive after 2030.
A spokesperson for the pension schemes said this would impact “millions, especially women”, the argument being women live longer, I suspect however that the bulk of the pensioners are men and that (as we know from the pension gender gap) most men get bigger pensions because they are linked to salaries which are skewed in men’s favor.
Which is why I see the real losers in this as not the pensioners (who mainly have CPI linked pensions- with inflation linking capped at 5%) but the schemes, which have over- bought index linked gilts to cover all inflation linked liabilities. They are left with piles of downgraded paper which had previously been used to help cut surpluses.
Schemes couldn’t help buying RPI linkers because CPI linkers haven’t been issued, so some schemes feel they’ve been having to mis-buy the wrong kind of inflation linked bonds (for the want of better). They may feel that the Treasury has let it down twice, firstly by changing the rules of the game and secondly by forcing it to buy the wrong equipment.
The judge and the Treasury are saying “tough”. Judge Holgate’s ruling revolved around whether parliament had power to make changes mid-stream and this is what he said
“Parliament did not find it necessary to confer or spell out an express power to change the RPI. Given the history and nature of the RPI as an index measuring consumer price inflation, it is obviously implicit in the duty . . . to compile and maintain that index that the UKSA is able to change it,”
In short ,the judge is telling pension schemes they knew the risks and have benefited over the years by the RPI overstating real inflation and linkers over-paying pensions. The Treasury will feel that pension schemes have had it lucky too long and they’ll be pleased the gravy train hits the buffers in 8 years time. The UK Statistics Authority will feel vindicated (as statisticians don’t get it wrong). This is the UKSA’s boss staying away from the politics and the commercials and staying grounded in fact
“At a time of rising prices, it has never been more important to have accurate and trusted measures of inflation. We have been clear for a number of years that the Retail Prices Index is a very poor measure of inflation, at times greatly overestimating and at other times underestimating changes in consumer prices.”
I suspect it is the integrity of UKSA , as much as the primacy of parliament, that has swayed the judge.
Stand by for lots of actuarial and legal analysis and very little interest from the general public.
This is an important ruling, but it’s a backroom deal that’s more important than the public coverage it will get.
I’m interested to hear views of collateral impact , for instance on public pensions, benefits and state pensions.
Disclaimer – only an amateur’s view
There are many people who read my blog who know a lot more about this than me and I fully expect to stand corrected on some of my analysis.
But – dear readers – my job is partly to learn from my blog’s mistakes, so please be kind in your comments!