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Pensions Bill [HL]

My Lords, I will speak to Amendment 48A in this group. I start by acknowledging the criticism made by the noble Lord, Lord Boswell, of the drafting; I very much take his point. I am also intrigued that he can read his notes after 45 years. I struggled today to read the notes that I made yesterday. Amendment 48A calls for a triennial report to assess the impact of using the consumer prices index as the measure of inflation. It seeks that assessment from, among others, pension scheme members, employers, taxpayers and PPF levy payers. It is an opportunity to reflect on what has become known as the RPI/CPI switch. We stated in the other place, and again in our debate yesterday on benefit uprating, that we cannot support the decision to adopt on a permanent basis the CPI as currently constructed for the determination of benefit uprating and of pension revaluation and indexation. However, if our understanding of the process and legislation is correct, we do not need more amendments to the Bill to secure any change in future—which may help my noble friend Lady Turner. Issues of uprating pensions, including the BSP, S2P, public sector pensions and occupational pensions, are determined annually. These are undertaken by the increase in the general level of prices, which is generally not specified to be RPI or CPI, or indeed any other measure. Therefore, if I am right, a future Secretary of State could take a different view on the most appropriate measure of the increase in the general level of prices, and without the need to change primary legislation. The situation with regard to the PPF is similar. Clause 15 removes references to the retail prices index and substitutes, "““the general level of prices in Great Britain””." But that does not lock in the CPI for all time. If I am wrong on that, perhaps the Minister will let us know, because we might want to table further amendments on Report. That runs also for the provisions of Clause 14, which my noble friend has addressed. The change to uprating the various facets of pensions by CPI—subject to statutory caps—will, as we know, have a significant impact, particularly over time. We obviously accept that for the basic state pension, where we support the re-linking to earnings which will provide the long-term determination of the basic state pension. For private sector occupational schemes, the extent to which the CPI ends up being used for revaluation and indexation depends on the scheme rules, and we support the Government in not pursuing the override. Nevertheless, the updated impact assessment produced by the DWP in February shows that the total cost in terms of reduction in the anticipated value of members’ pension rights—including the stock as well as the flow of pensions—is something like £86 billion, which is a considerable sum. This is not a deficit-reduction saving; it is an almost equal and opposite benefit for sponsoring employers, and there are consequential benefits to the PPF and levy payers. The Pensions Policy Institute has calculated that for public sector workers the switch could cost a median earner 4 per cent a year at age 75 and 8 per cent a year at age 85. A deferred member of an occupational scheme who withdraws at age 40 could have their starting pension income reduced by around 20 per cent at age 65. The purpose of this amendment is to remind noble Lords that much rests on the switch to the CPI, if it were a long-term decision. Keeping the impact under review would bring home its ramification for those affected. In our debate yesterday, the Minister accepted that no index is perfect. The question of whether the CPI should be the primary measure of consumer price inflation is still the subject of academic debate. The UK Statistics Authority has suggested that it should, but only when the inclusion in the index of owner-occupier housing costs has been achieved. The Royal Statistical Society has questioned whether CPI coverage makes it appropriate for all purposes. While noting that the CPI’s methodology has many supporters—and we know that the Minister is one—the society questions whether the comprehensive use of the geometric mean at the lowest level of aggregation is the best approach for products where consumers are typically slow to substitute newly cheaper outfits, brands or varieties for existing, more expensive ones. There is also the issue of using one index for all purposes. The Government have made a virtue of that, but is it right to have one index that is as relevant to pensioners as it is to those on benefits, as it is for macroeconomic management? We could debate the fine detail of indices and the economic theory which underpins them all, but we know that there is no perfect answer. However, because the change has such profound consequences, we should certainly monitor its impact, which is what my amendment seeks to do. We should also be opposed to committing to a long-term change when there is no settled view on the CPI index as currently constructed. Given the long-term nature of pension policy, one should move away from the status quo with caution and only after full analysis. We should also have regard to the expectations built into the current system, not least the expectations of millions of public sector members who believe that they were unfairly dealt with by shadow spokespersons in their response to the proposals on future uprating of public sector pensions. My amendment is very modest, seeking only an ongoing basis for analysing the consequences of the CPI switch. However, it carries with it our belief that we cannot commit to the CPI index as it is over the long term. I accept that we might be criticised for accepting it as a short-term expedient to help us through deficit reduction. However, we should recognise that some of the consequences, costs and benefits that flow through occupational schemes are nothing to do with deficit reduction; they are a switch between employees and sponsoring employers.