What's in an index?
Editorial: The defined benefit green paper published this week has caused consternation in many parts of the pensions industry, which expected to see a more decisive take on the issues facing DB.
Informal comments in the industry about the consultation paper ranged from ‘a bit underwhelming’ to ‘it could have been written by a child’.
Sir Steve Webb said the paper was trying to discuss all the issues again that have long been debated in government and the industry (read more here). Others speculated that the government was not prepared to upset scheme members and trade unions.
Pensions minister Richard Harrington has said the green paper was not a way of kicking the can down the road, but it does look excessively cautious. And while it notes that there is no affordability issue, the question arises as to why reducing liabilities is an area of significant discussion when a focus on cost efficiency and regulation seems more pressing.
Among others, the paper raises the question of pension indexation. With about three quarters of DB schemes having retail price index written into their scheme rules, a blanket option to switch would affect large parts of the membership.
The green paper mentions research by consultancy Hymans Robertson that shows a move to CPI would reduce pensions over an average DB member’s life by £20,000, and the figure would be substantially more with a move to statutory indexation only.
Taking such a step is clearly not in the interests of members – or politicians. Still, the concession that stressed companies with underfunded schemes could be allowed a suspend indexation has already led trade union Unite to flex its muscles.
Looking at indexation also raises two other issues the government seems reluctant to tackle. One is the fact the Debt Management Office has continued to issue RPI-linked gilts and would be hit in its “ability to issue debt in a cost-effective way” if many schemes turned to the consumer price index.
The other unresolved question is whether CPI should itself be replaced by CPI including owner occupiers’ housing costs. That CPIH is barely mentioned in the green paper could be a hint that there is no intention of delving all that deeply into any debate around indexation arrangements.
Sandra Wolf is editor at Pensions Expert. You can follow her on Twitter @SandraCWK and the team @pensions_expert.