Conservative peer Lord Willetts has spoken out against the scope of the Government’s green paper consultation on defined benefit pensions, criticising its lack of regard for intergenerational fairness.
The former Tory minister said the consultation had narrowly focused on whether to allow schemes to modify indexation promises in order to avoid sponsor insolvency.
The comments, coming a week after the Resolution Foundation, of which Willetts is the executive chair, found that DB deficit payments are lowering aggregate annual pay by as much as £2.2bn a year.
Employees at companies that have to plug deficits are paid 0.6 per cent, or £200 a week, less than those at firms with no DB underfunding.
It would have been reasonable I think for a statistical agency to say RPI no longer exists, you have to use something else
Andrew Hood, Institute for Fiscal Studies
“What we’ve added to the debate with our new Resolution Foundation work is evidence that there is an effect on the wages of current workers, and I hope that the DWP will consider that,” Willetts told Pensions Expert.
“I personally think that what was done on the public sector was the right thing to do,” he continued, referring to the decision to allow all schemes in the sector to shift their basis of uplifting to the consumer price index.
“I’m not a lawyer, whether you could do that for all private pensions I don’t know, but I hope they will at least consider that option,” he continued.
How do you solve a problem like RPI?
Private sector schemes are currently subjected to a ‘rules lottery’, whereby their ability to switch indices is largely dependent on the exact wording of their trust deed.
However politicians and the pensions industry alike have so far proved hesitant to allow the modification of accrued rights for pensioners.
While the legal basis for scrapping the retail price index may look shaky, there may be a practical case for doing so, argued Andrew Hood, a senior research economist at the Institute for Fiscal Studies.
“RPI got noticeably worse as a result of a methodology change in 2010. It would have been reasonable I think for a statistical agency to say RPI no longer exists, you have to use something else,” he said.
He cautioned, however, that the government would not want to be seen to disregard contracts effectively made between schemes and members.
Will it solve the big problems?
For all the relief that relaxing rules on indexation might bring to struggling DB employers, it remains unclear whether doing so would solve the macro-economic issues linked to the current pensions system, said Dean Hochlaf, an assistant economist at the International Longevity Centre.
ILC research has suggested a link between risk aversion in investment and a lack of growth in the UK economy.
“We’re actually in quite a big rut at the moment. Productivity hasn’t grown since 2008, we’re far below many other countries, and we are going to need to compete with these countries, especially in a post-Brexit world,” said Hochlaf.
He said that small changes to rules governing indexation would be unlikely to transform the UK economy, and urged policymakers to encourage infrastructure investment along the lines of that seen in Canada and Australia.
“In any investment, if you want good returns there’s going to be an element of risk involved, this shirking of risk... perhaps it’s not serving us well in the long run,” he continued.
