Imminent Law Change To Drop Pension Scheme Index Linking From Rpi To Cpi

[workingpoor]

RPI indexing was looking unsustainable be prepared for alot more Pension Schemes to follow suit. I'll have a wry chuckle despite having a frozen rpi index linked final salary pension myself!

http://news.sky.com/story/1702095/ministers-to-unveil-tata-steel-pension-revamp

Ministers will this week unveil proposals that would slash billions of pounds from the liabilities of the British Steel pension scheme as they seek to smooth a path for a buyer of Tata Steel's UK operations.

Sky News has learnt that the Government is expected to launch a consultation on Thursday that would, if implemented, require a change in pensions law in order to radically restructure the £15bn fund.

The proposals include altering the annual uplift in pensions provided to scheme members from the RPI inflation index to the CPI index, which would save an estimated £2.5bn and allow the scheme to be hived off into a separate entity.

However, they are likely to stoke controversy because if they were introduced, they would effectively trigger a reduction in the benefits that will be paid out in future to thousands of steelworkers.

Sources said the plans were likely to be outlined in a written statement from a minister from the Department for Work and Pensions sometime on Thursday, although they cautioned that they were still being finalised on Wednesday evening and remained subject to change.

The urgency of the timetable to secure the future of Tata Steel's UK operations, which directly employ more than 11,000 people, means that the consultation period is expected to last only a few weeks.

However, the DWP and Treasury are said to be concerned that such a move could set a dangerous precedent for the pension schemes of other troubled companies.

A Government spokesperson said: "We absolutely recognise pensions are a challenge.

Edited May 26, 2016 by workingpoor

[SarahBell]

A Government spokesperson said: "We absolutely recognise pensions are a challenge.

Pensions are not the challenge. People receiving them and living too long are the challenge.

[eek]

Pensions are not the challenge. People receiving them and living too long are the challenge.

2 things destroyed pensions..

In 1997 Gordon Brown introduced Dividend tax on pensions..

ZIRP destroyed everything else. If you look at those schemes back in 2006 everything was healthy now they are hundreds of millions if not billions in arrears...

And changing to CPI doesn't solve anything.... It merely delays the inevitable that much further...

Edited May 25, 2016 by eek

[frederico]

Well if house prices and rent crash then CPI will be the better bet, would be hilarious if it worked out that way.

Edited May 25, 2016 by frederico

[long time lurking]

Pensions are not the challenge. People receiving them and living too long are the challenge.

Nope RPi is far higher than the returns the scheme`s can achieve from their investments ,also cpi is easily manipulated ,compared to RPI ,Zirrp has crucified the pension industry,and this move signals zirrp is going to be around for a long long time

[R K]

Osborne legislated in his 2010 budget the change in minimum "revaluation orders" from RPI to CPI.

FS pensions werent killed by ZIRP - Zirp makes no difference. Lower yield = higher asset prices so its a wash.

globalised labour arbitrage espec. from China & return to capital > return to labour destroyed FS pensions.

Tata pension scheme isnt in trouble due to employees living longer. Its due to Tata steel business being unprofitable due to collapse in global steel prices.

[R K]

Nope RPi is far higher than the returns the scheme`s can achieve from their investments ,also cpi is easily manipulated ,compared to RPI ,Zirrp has crucified the pension industry,and this move signals zirrp is going to be around for a long long time

Utter tripe.

http://blog.alphaarchitect.com/2016/05/23/an-epic-historical-performance-streak-domestic-6040/?utm_source=Alpha+Architect+Website+Users&utm_campaign=eea0e33829-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_2f87b7924e-eea0e33829-149743641#gs.jMDHMhs

US-centric 60/40 portfolios have literally knocked it out of the park since 2010. Nearly a 10 percent compound annual growth rate, less than a 7 percent worst drawdown, and a Sharpe ratio of 1.33 (see below).

Edited May 25, 2016 by R K

[long time lurking]

Osborne legislated in his 2010 budget the change in minimum "revaluation orders" from RPI to CPI.

FS pensions werent killed by ZIRP - Zirp makes no difference. Lower yield = higher asset prices so its a wash.

globalised labour arbitrage espec. from China & return to capital > return to labour destroyed FS pensions.

Tata pension scheme isnt in trouble due to employees living longer. Its due to Tata steel business being unprofitable due to collapse in global steel prices.

Utter tripe the price of steel has sweet FA to do with the return the fund receives on the money invested ,that fund was 80 million in the black c2006 the ratio of paying in to claiming has hardly risen so why has it gone into the red by so much ? employe and employer are still paying the same % the price of steel has jack shit to do with pensions tata don`t even manage the scheme it other than

[long time lurking]

Utter tripe.

http://blog.alphaarchitect.com/2016/05/23/an-epic-historical-performance-streak-domestic-6040/?utm_source=Alpha+Architect+Website+Users&utm_campaign=eea0e33829-RSS_EMAIL_CAMPAIGN&utm_medium=email&utm_term=0_2f87b7924e-eea0e33829-149743641#gs.jMDHMhs

Totally different game in the US what % do they have to hold legally in aaa+ (gov bonds) ?

[dgul]

You can't just hate all pensions, disagree with all people with pensions as troughers.

These people did a job with a set of benefits. A big part of this was salary, but there were others - pension being an important one. When you get a job you weigh up all of these benefits - The Tata employees were willing to take the job based on this package of benefits - a commercial arrangement. If they offered RPI then that was a positive compared with other jobs which only offered CPI. Going against this is a breach of contract.

I appreciate that the fund is in trouble, but this isn't a good thing in any way.

[olde guto]

and don't forget the 'pension holidays' where companies stopped paying in ( the schemes were all running a massive surplus apparently) and instead paid out the contributions as dividends instead.

Here's an article from 2002 referring to an investigation done by the Daily Mail into pension holidays http://www.standard.co.uk/news/pension-holidays-led-to-crisis-6342191.html

New research by Financial Mail shows that if corporate Britain had not taken so many lengthy holidays and held back £20 billion while stock markets boomed, they would not now be facing such huge funding shortfalls.

It's quite depressing that instead of being goats a lot of people here are surprisingly sheep like. That git Brown has to accept his fair share of the blame for the mess without a doubt, but so do the companies that were taking pension holidays!

[Royw6]

None of you seem to understand, rich people need more money, and for them to have it so they can buy more houses, we need to realise that things like pay, holiday entitlement and pensions must be cut. Rich people are skittish and don't like poor people living too long. Therefore we must have our pensions cut, and vote leave in the EU referendum so holidays can be cut too.

Jokes aside, it is incredible that it took two world wars to have some minor equality such as pensions, healthcare, education and home ownership to be granted to the poor, and now we hand it all back - pensions are affordable easily in a country where houses cost up to £250m plus and people like the duke of Westminster pays no tax. The CPI pension scandal started with civil servants and teachers, the public said nothing, now industry and MPs are coming for the public. On a positive, MPs have a final salary pension RPI linked based on a 20 years career, so ever cloud...... Democracy rules!

[workingpoor]

Switching from rpi to cpi was declared legal by the High Court on 2 Dec 2011

http://www.telegraph.co.uk/finance/personalfinance/pensions/8930868/Public-pensions-switch-from-RPI-to-CPI-declared-lawful-by-the-High-Court.html

It results in a 17% reduction in payments and a large reduction in lump sum payouts

l

[stormymonday_2011]

Switching from rpi to cpi was declared legal by the High Court on 2 Dec 2011

http://www.telegraph.co.uk/finance/personalfinance/pensions/8930868/Public-pensions-switch-from-RPI-to-CPI-declared-lawful-by-the-High-Court.html

It results in a 17% reduction in payments and a large reduction in lump sum payouts

l

That ruling specifically applied to public sector pensions such as the Civil Service scheme. They moved to CPI linking some time ago. Edited May 25, 2016 by stormymonday_2011

[porca misèria]

It results in a 17% reduction in payments and a large reduction in lump sum payouts

17% is presumably some kind of actuarial projection, like the figures being bandied about for the effects of brexit.

But what lump sums are affected, and how?

[edit] The only 17% in the article is much more of a finger-in-the-air figure, and refers not to a reduction in payments but to an end figure. Where does your 17% come from?

Edited May 26, 2016 by porca misèria

[workingpoor]

They told the court the cumulative impact could be to reduce the value of benefits to pension scheme members by around 15pc on average and also substantially reduce lump sum payments on retirement.

******************

Tom McPhail, a pensions expert at Hargreaves Lansdown, the financial adviser, estimated that the switch from RPI to CPI would mean a reduction of 17.7pc for public sector workers during a typical retirement.

Edited May 26, 2016 by workingpoor

[SpectrumFX]

17% is presumably some kind of actuarial projection, like the figures being bandied about for the effects of brexit.

But what lump sums are affected, and how?

[edit] The only 17% in the article is much more of a finger-in-the-air figure, and refers not to a reduction in payments but to an end figure. Where does your 17% come from?

The public sector pensions have all moved to a "Career Average" basis, so lump sum's will no longer be based upon final salary, but the actual salary received each year indexed to CPI. The historical final salary schemes seem to mostly be being frozen at the point of the change with the lump sums based upon "final" salary at that point indexed to CPI.

Different people are effected in different ways depending upon their circumstances. As ever the trend is that the younger you are the worse off you'll be.

I had a deferred civil service pension (I left in 2003) that was being indexed to RPI. I was even being sent letters showing me the revalued amounts. That has been retrospectively changed to a CPI valuation. The pensions payable in 2036. The article below quotes an annual difference between RPI and CPI of 1.2%. 1.2% for 33 years is 48%.

48%!

https://www.statslife.org.uk/economics-and-business/33-rpi-versus-cpi-what-s-the-difference-why-does-it-matter-will-it-make-you-poorer-or-richer

[porca misèria]

The public sector pensions have all moved to a "Career Average" basis, so lump sum's will no longer be based upon final salary, but the actual salary received each year indexed to CPI. The historical final salary schemes seem to mostly be being frozen at the point of the change with the lump sums based upon "final" salary at that point indexed to CPI.

Different people are effected in different ways depending upon their circumstances. As ever the trend is that the younger you are the worse off you'll be.

I had a deferred civil service pension (I left in 2003) that was being indexed to RPI. I was even being sent letters showing me the revalued amounts. That has been retrospectively changed to a CPI valuation. The pensions payable in 2036. The article below quotes an annual difference between RPI and CPI of 1.2%. 1.2% for 33 years is 48%.

Aha! An explanation that starts to make sense. Thank you.

I guess the underlying problem is pie-in-the-sky promises by earlier generations, coming home to roost.

'Tis a curse to be numerate but politically naive. If I had entered a Final Salary scheme 30 years ago I might've lost some of it in recent years, but I'd still have a lot more than I'd paid in. But instead I thought "those can't possibly survive the demographics of retiring boomers[1], and will go bust long before I get to retirement age", and stayed well clear. Saving up for a house seemed much more urgent ...

[1] A word that hadn't yet been appropriated by Willetts to pull in a Scapegoat Generation having *** all in common with his in terms of life experience.

[workingpoor]

Commons statement by Javid later today,

this consultation will be completed by next Thursday due to the urgency of needing to complete the sale of TATA steelworks UK.

Government is being warned not to rush into making law changes to Pension schemes to make the sale easier.

How will this effect those who max out their pension contributions whilst taking a lower salary?

Edited May 26, 2016 by workingpoor

[porca misèria]

How will this effect those who max out their pension contributions whilst taking a lower salary?

It won't.

Unless you can find a Final Salary scheme where you max out contributions? Which would kind-of negate them ...

[stormymonday_2011]

Commons statement by Javid later today,

this consultation will be completed by next Thursday due to the urgency of needing to complete the sale of TATA steelworks UK.

Government is being warned not to rush into making law changes to Pension schemes to make the sale easier.

How will this effect those who max out their pension contributions whilst taking a lower salary?

It makes no difference at all to defined contribution schemes. They are not tied to salary. By definition they can only pay out what is actually in an individuals pension fund.

One thing worth noting is that defined benefit schemes with large numbers of retired or deferred members such as the British Steel Pension fund should have shifted the bulk of their assets into index linked gilts years ago since they can calculate their future liabilities with a fair degree of accuracy (i.e the final salary is already known). In theory they should not have unexpected deficits. If they have not then the trustees and actuaries may find themselves with questions to answer.

Edited May 26, 2016 by stormymonday_2011

[R K]

Utter tripe the price of steel has sweet FA to do with the return the fund receives on the money invested ,that fund was 80 million in the black c2006 the ratio of paying in to claiming has hardly risen so why has it gone into the red by so much ? employe and employer are still paying the same % the price of steel has jack shit to do with pensions tata don`t even manage the scheme it other than

Pension schemes manage assets/liabilities on a long term "matched" basis. Decades+

They conduct actuarial valuations periodically (3 years typically).

As a result of these valuations schemes will be either in deficit or surplus at that point in time.

As a result schemes agree, with employers, whether they need to plan for increased contributions from employer/ees or not & over what period.

If the employer is losing money then clearly there is a future funding problem directly related to that lack of profitability & employer contributions.

Short run deficits really are not an issue per se unless the business itself is in difficulties. See bhs for details.

hence a few years of low interest rates have little bearing. As proved to you above, the returns on a bog standard 60/40 portfolio over last 5 years has been over 10%. As yields fall, bond prices rise. Since FS pension schemes liquidate assets to match liabilities over the lifetime of the liabilties this results in little change overall. Ditto equities - as yields fall, prices rise so the capital value of the fund assets increases.

hope that helps with your lack of understanding

Edited May 26, 2016 by R K

[Frugal Git]

The problem with pensions is purely whichever flipping geniuses thought they could create 2/3 final salary, 5% guaranteed compound annual increase with 60% spousal cover pensions and then seriously think that there would be enough in the pot at retirement to say for such a thing for the remainder of life. Fantasy economics.

These enormous pension deficits are completely stuffing things again for the young. No salary rises for you lad - Bernard over there, 76 on 50k per year on a year long cruise needs another 2500 payrise.

[R K]

That ruling specifically applied to public sector pensions such as the Civil Service scheme. They moved to CPI linking some time ago.

At risk of repeating myself Osborne legislated for private sector schemes to switch to CPI in 2010 budget. Referred to as "revaluation orders"

I have here in my hand a letter from one of my FS schemes (major global financial institution) notifying me to this effect in 2011.

Private sector FS schemes have been trying to wriggle out of their liabilities for some time. It is de facto a default on employee total remuneration at a time when corporate profits have never been higher & corporate coffers in aggreate never fuller.

This is in effect a game being played out between an Indian billionaire & Chinese state billionaires. Few thousand welshmen are simply the hapless pawns in that high stakes game of global capital/wage arbitrage & UK govt. just the enabler.

It has nothing to do with nirp,zirp or the pension scheme investments.

[SarahBell]

You can't just hate all pensions, disagree with all people with pensions as troughers.

These people did a job with a set of benefits. A big part of this was salary, but there were others - pension being an important one. When you get a job you weigh up all of these benefits - The Tata employees were willing to take the job based on this package of benefits - a commercial arrangement. If they offered RPI then that was a positive compared with other jobs which only offered CPI. Going against this is a breach of contract.

I appreciate that the fund is in trouble, but this isn't a good thing in any way.

Fine then let them sue.

Pensions need sorting out so that they make sense for the person paying in and the company paying in too. If it doesn't work for both parties then it's wasted.