RPIJ and CPIH inflation indices are now designated national statistics
The UK Statistics Authority has now officially approved the elevation of RPIJ and CPIH from experimental to national statistic status.
This follows its report last September setting out nine enhancements that it required the Office for National Statistics (ONS) to implement in order that the “experimental” classification could be removed from these statistics (see Pensions Bulletin 2013/40).
The UK Statistics Authority is satisfied that eight of these required enhancements have now been implemented. The change in designation is also based on the commitment by the ONS to publish a response to the ongoing Review of Governance of Prices Statistics once this has reported (it was expected in October 2013 but is still awaited).
By contrast, the traditional Retail Prices Index (RPI) measure of inflation lost its national statistic status in March 2013 when the UK Statistics Authority concluded that it no longer met the requirements of the relevant Code of Practice for Official Statistics (see Pensions Bulletin 2013/13).
There has been no announcement so far from either HM Treasury or the Debt Management Office as to whether this upgrade of the status of RPIJ will lead to a review of the various scenarios in which the traditional RPI is still the inflation index of reference, including the basis on which index-linked gilts are issued. However, there is a review in progress which is considering what changes are needed to the range of UK consumer price statistics to best meet current and future user needs which is due to report by the summer.
Comment
On average, RPIJ has been about 0.5% lower than RPI over the past 12 months. The endorsement of RPIJ as a national statistic may encourage employers with schemes with a flexible inflation definition to consider proposing the use of (the potentially cheaper) RPIJ rather the standard (but now downgraded) RPI within their scheme structure. Clearly, the precise wording of scheme rules (and member communications) will be key in each case.
Conservatives pledge to keep state pension triple-lock guarantee until 2020
Speaking on the BBC's Andrew Marr Show on Sunday, David Cameron pledged that should the Conservatives win the next general election, the "triple-lock" guarantee for state pension increases, which ensures they go up by whichever is higher of inflation, wages and 2.5%, will continue to the following general election in 2020.
The Lib Dems and Labour have both supported the pensions triple-lock in principle but have made no commitment about whether they would keep it after the next election. Labour leader Ed Miliband said: "We will set out our plans in the manifesto for all of our tax and spending proposals. That's the right time to do it but nobody should be in any doubt about my commitment to the triple-lock on pensions”.
Former Labour minister and long-standing poverty campaigner Frank Field warned there would have to be tax increases to pay for any triple-lock pledge and asked why "yet again pensioners should be exempt when everybody else is being called on, quite rightly, to make sacrifices".
Comment
The clear implication of this statement is that not only will those receiving the Basic State Pension continue to enjoy the benefits of the triple-lock, but so also will those who from 2016 will be receiving the single tier state pension (the legislation for which promises only an earnings linkage). Whilst pensioners will welcome this statement it does put further pressure on other parts of the social welfare budget, which the Chancellor, in a further statement this week, has pledged to cut back.
Should pensioners be given the power to switch annuity providers?
Pensions minister Steve Webb has suggested that pensioners should be given the power to switch annuity providers. In an interview with the Sunday Telegraph he said that switching annuities should be as common as switching mortgage deals.
The Association of British Insurers (ABI) warned that in practice this might be more difficult to achieve. "Purchasing an annuity guarantees someone an income for life from their savings. It is calculated based on a number of factors including life expectancy, so it is not as straightforward as a fixed term mortgage calculation. Many people welcome the certainty an annuity gives them although there are other ways they can choose to take their pension”. Gregg McClymont, shadow minister for pensions, said in a parliamentary debate that Steve Webb’s idea is a “non-starter”.
Comment
Steve Webb has made clear that this is his view rather than formal Government policy. But as a succession of reports in 2013 have highlighted the potential for poor value to be delivered by those converting their DC retirement savings into a pension it is inevitable that policymakers will be looking closely at the annuity market, starting shortly after the Financial Conduct Authority reports early in 2014. It remains possible that they will not stop at seeking to ensure that the customer gets the best possible, but one-off, deal given that they are then locked into it for the rest of their life.
ACA survey shows support for “save more tomorrow” scheme designs
In its latest survey of pension trends, the Association of Consulting Actuaries (ACA) has suggested that a “save more tomorrow” initiative, in which contributions are subject to some form of escalation mechanism, is worthy of consideration as a means of encouraging higher pension contributions over the years ahead as the economy recovers. Its survey shows that a majority of employers are supportive of this idea.
The first release from the survey back in November focused on attitudes to the Defined Ambition ideas floated by the Government at the end of 2012 and on which it has since launched a more formal consultation (see Pensions Bulletin 2013/47).
The second release focuses on levels of pension contributions and feedback on some of the issues and challenges raised by the early stages of auto-enrolment. It reveals that:
- Average DC contribution rates have changed little over the past decade – employers are contributing 4.5% to 7% of earnings and employees 4% to 4.5%
- Over half of employer respondents are targeting pension costs of 4% of payroll or more – and expect payroll costs to rise by up to 2% as a result of auto-enrolment
- Two-thirds expect the typical retirement age to be at least 66 by 2020 and half between 68 and 75 by 2028
- Most smaller employers had not yet budgeted for the costs of implementing auto-enrolment and expect higher opt-out rates (26-30%) than large firms (6-10%); and
- One in five firms expect to auto-enrol employees either into NEST or a new multi-employer scheme – half of smaller firms had yet to decide where to auto-enrol their staff
The ACA suggests that contribution levels, which have already flat-lined, are likely to decline as a consequence of the introduction of auto-enrolment, at least until the minimum qualifying contribution level of 8% has been rolled out across the workforce in 2018.
The ACA also warns of the dangers of pressing ahead with the current timetable of rolling out auto-enrolment to micro employers (4 or fewer employees) from June 2015, suggesting a pause to reflect on the promising start and to learn the lessons so far as this may help ensure the success of the remainder of the programme.
Pensions Regulator publishes guide to changes to the scheme return for DB and hybrid schemes
The Pensions Regulator has published a useful short guide to the questions that will be asked in the annual scheme return for defined benefit (DB) and hybrid schemes. In particular, the guide highlights those areas that are the subject of new questions.
These include detailed questions of hybrid schemes, DC sections and DC AVCs, along with questions on asset-backed contribution arrangements and incentive exercises.
Comment
The Regulator has started to issue scheme return notices to trustees that will need to be completed and submitted by the relevant deadline. Given the number of new questions being asked, trustees will need to ensure that the notices find their way to the right person as soon as possible.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
