Inflation figures and Pension increases
The UK September year-on-year inflation figures, to which our 2016 pension increases are linked, were announced today. The RPI increased by 0.8% and the CPI increase was minus 0.1%. Fortunately our pension increases, which have been linked to the CPI since 2011 cannot be reduced. We will however, receive no pension increase next April. Had the undertaking been honoured that was given in the 25 January 1984 BA News that APS and NAPS pensions would receive increases linked to the Cost of Living Index (with NAPS increases capped at 5%), APS and NAPS pensions would be receiving increases of 0.8% next April. It was universally understood in 1984 that the Cost of Living Index meant the RPI. Cost of Living Index and RPI were terms that were used interchangeably then, as people involved in industrial negotiations at the time will testify.
Since 2011 the difference between CPI and RPI has been increasing. In 2011 we lost 1.5%. In 2012 APS lost 0.4% but NAPS lost nothing because of the 5% increase cap. In 2013 we lost 0.4%. In 2014 we lost 0.5%. In 2015 we lost 1.1% and in 2016 we will lose 0.8%.
In addition APS pensioners have not been paid the 0.2% increase which the Trustees agreed in 2013 because British Airways is challenging the APS Trustees in the High Court.
It was extremely good to see the "exceptional" turnout of MPs for the 14 September Adjournment Debate on British Airways and Pensions Uprating. All MPs present had clearly read and understood the undertakings that were given in the 25 January 1984 edition of the British Airways News. It is time for British Airways, whose behaviour has already been described by the Chancellor of the High Court as “entirely unrealistic and unreasonable”, to honour the undertakings that it gave when it was under Government control and being readied for privatisation. I have written to all the MPs who spoke in the Debate and to others who were present on 14 September to thank them for their support.
Persistence will win us back the RPI increases which we were promised in 1984 and to which the APS Trustees have undertaken to return on numerous occasions and which return was written into the 2012 APS Valuation Assumptions. These Triennial Valuation Assumptions were agreed by BA (as required by law) in 2012 before BA subsequently challenged them in the High Court in 2013 some 18 months later.
New Chair of Trustees & Court Case
Two announcements were made on October 1st in the “Other News” part of the APS Section of the MyBAPension website. The key points are that Virginia Holmes has been appointed by BA to be the new Independent Chair of APS and NAPS and that BA’s court case against the APS Trustee Board has been put back until October 2016 to allow BA to call expert witness evidence.
It had been the ABAP Committee's intention to invite the new Chair of the APS and NAPS Boards to address the ABAP AGM which was held yesterday, 1 October. However, because we did not know that the new Chair was to be Virginia Holmes until four hours before the event, this was not possible.
The ABAP AGM was addressed, at the ABAP Committee’s invitation, by APS pensioner-elected Trustee, Paul Douglas. Paul paid tribute to the late Cliff Pocock, who had served for many years as a key APS Trustee. He also spoke warmly of Paul Spencer whom BA had decided to replace as Chair of the pension schemes.
From Ms. Holmes viewpoint it must be a bizarre, and quite possibly unique, experience to accept a post as Chair of a pension scheme which is being sued by your employer. There must be an interesting contract of employment.
We shall look forward to meeting Virginia Holmes in due course. Meanwhile, we all need to be grateful to the Trustees of both APS and NAPS who work so hard on behalf of the beneficiaries of both schemes. It is an onerous and thankless task to be a Trustee. You might even be sued by the employer.
The feedback from the Adjournment Debate continues to be good. The past governance shenanigans of APS are now well and truly on the public record in Hansard and only the more out of touch MPs are still parroting, “we believe CPI is a better measure of inflation than RPI” in their letters to their BA pensioner constituents. The much more common sentence now deployed by Conservative MPs is, "The Government is very sympathetic to those involved in the BA pensions case." It is instructive to read letters from many different MPs which use identical sentences and paragraphs!
Len Jones’s persistence in succeeding with his project to achieve a Parliamentary debate on BA and Pensions Uprating is an example to us all. The non-partisan response of MPs to Kate Green’s brilliant non-partisan presentation of our case, both at the debate and in letters following the debate, reflects favourably on all MPs concerned on both sides of the political divide. If your MP was not present or has written a letter totally misunderstanding the position, I suggest that you write and correct him or her. For example I have read one letter from a very senior politician indeed who thinks that the APS problem has something to do with the Pension Protection Fund. Such an expression of ignorance is not unique amongst those MPs who are not “detail” people!
The news that the BA v the APS Trustees anticipated 25-day case in the High Court has been put back another 8 months to October 2016 is not unexpected and no doubt was intended by BA when its lawyers demanded the right to call expert witnesses. However, in the preamble to his case management appeal judgment, Mr Justice Warren wrote: “For the Trustees (and the beneficiaries of the Scheme), the final resolution of BA’s claim is required urgently. The Trustees have had to withhold the increases to which BA say the pensioners are not entitled. Many of the pensioners are elderly, with deaths occurring amongst their number as one would expect. Individuals are thus being deprived of payments to which, on the Trustees’ case, they are entitled and which they may not live to enjoy even if their estates benefit. The fear is that the admission of allegedly irrelevant expert evidence will delay yet further the resolution which is sought.” There is no doubt that justice delayed is justice denied.
Links to the MyBAPension articles can be followed here (Virginia Holmes) and here (Court Case).
"Adjournment Debate HoC 14 September 2015: “British Airways and Pensions Uplifting
An adjournment debate on “British Airways and Pensions Uprating” was held at 10.15 pm on Monday 14 September 2015 in the Main Chamber of the House of Commons. The debate was sponsored by Kate Green MP on behalf of her BA pensioner constituent and ABAP member, Len Jones, supported by Leader of the House, Chris Grayling. The Minister who responded on behalf of the Government was the Parliamentary Under-Secretary of State for Work and Pensions, Mr Shailesh Vara. The debate was non-partisan and was attended by between 30 and 40 MPs which is apparently an exceptional turn-out for such an adjournment debate (which usually attracts the sponsor, one or two other MPs at most and the responding minister). It has been reported that more MPs watched the debate from the Gallery. Len Jones and six ABAP Committee members also attended. There was also another ABAP member with us in the Strangers’ Gallery who happened to be there on other business.
Kate Green gave a bravura, non-partisan performance. She was congratulated by MPs on both sides of the political divide. I have written to thank her and to congratulate her for putting our case so well. The issue debated was the failure to pay RPI increases to BA final salary pensions, both APS and NAPS – the latter capped at 5%. In the 1984 BA privatisation process, BA employees were promised that pensions would increase with the RPI. Employees were offered large cash lump sums of typically a year’s salary to transfer from the Airways Pension Scheme (APS) to the New Airways Pension Scheme (NAPS). The debate on Monday was remarkable for the unanimous support of all MPs present for the BA pensioners’ case.
A 30 minute Youtube recording of the debate has been uploaded by Mike Austin: Google “youtube british airways pension debate” and see if you can spot your MP. This link will also take you there. The video has now been viewed ore than 700 times.
Hansard, the written record of Parliamentary business is available in hard copy or online.
The UK Statistics Authority (UKSA) consultation on the measurement of consumer prices
The UK Statistics Authority (UKSA) is consulting on the measurement of consumer prices. Groups (eg ABAP) and individuals are encouraged to respond. ABAP will be submitting a response. The closing date for all responses is 15 September 2015. The consultation is in the form of an online questionnaire, for individuals and groups. Here is a link to it:
Although some parts of this consultation are irrelevant to BA pensioners, ABAP thinks it is important the powers that be are continually reminded of our CPI/RPI problem. Below is the draft ABAP response. We will modify this on any feedback we receive from ABAP members. Could you send any views to Ian Heath, whose email address is firstname.lastname@example.org, by the end of Sunday 13th September?
It is worth reading through the questionnaire if only to get the background on the issues and the usual definitions. One can save an incomplete reply and return to it later. We welcome ABAP members making individual responses.
The ABAP committee’s general view is that RPI and CPI are probably both flawed; neither is better than the other; the 1 percentage point gap between their annual rises is unacceptable due to the financial loss this brings to BA Pensioners. We need a better measure of our inflation than CPI (assuming we can't have RPI, which we prefer to CPI).
Here is the draft ABAP reply:
Q1. Should ONS identify a main measure of price change across the economy?
There is confusion, due to the range of 'inflation' or 'price change' measures and a tendency for the relevant authorities to 'shop' for the one that is best for them (eg CPI is used for state pensions (as part of the triple lock) but (the generally higher) RPI is used for rail fare increases and student loan interest.
Q2. If you answered 'yes' to question 1, then what should this measure be?
• the CPIH, as recommended in the Johnson review. The CPIH includes owner-occupiers' housing costs. It does not currently hold the National statistics designation (although its reassessment is due to commence shortly). The index is a UK measure, designed by ONS to meet UK needs.
• the CPI, ONS's current headline measure. The CPI is an EU measure, designed by Eurostat to ensure comparable consumer prices statistics across the EU.
• Other (please provide details).
CPIH is better than CPI but it needs to be improved (eg to have a better method of measuring housing costs than “rental equivalence”, also to include Council Tax). The UK Government has no direct control over CPI methodology, resulting in compromises that are ok if measuring difference in inflation across the European Union (the various EU HICPs) but not ok when measuring UK inflation (eg owner-occupied housing costs are left out of CPI due to no agreement across the EU on their measure).
Our pensions had been linked to RPI but are now linked to CPI. We have not seen the evidence that CPI is a better measure of our inflation than RPI and remain deeply concerned by the annual difference in RPI and CPI rises; currently CPI annual rises are around 1.0 percentage points below RPI annual rises. It is also unacceptable that, for example, our CPI-based pension rises take no account of owner-occupied housing costs
Of the current indices, we prefer RPI. However, if RPI is now deemed unsuitable as a national statistic we would welcome the development of a Household Inflation Index.
Q3. Should its production be governed by legislation?
It is better that production is governed by an independent body. If governed by legislation, the index’s methodology might not be modified quickly enough, when necessary.
Q4 Should ONS seek to measure changes in prices as experienced by different households?
This is a lower priority though. We first need an overall Household Inflation Index that better reflects our cost of living than CPI
Q5 If yes, how should ONS seek to do so?
• Using a payments-based approach.
• On the same basis as existing measures such as CPI.
• Via another means (please provide details)
Why? Please provide comments.
A payments-based approach best reflects pensioners’ expenditure
Q6 Do you use the following indices? (Please select those that you use)
• Tax and price Index
• RPI pensioner indices
• Component indices of the RPI
• Any other RPI index
Answer: Yes: RPI pensioner indices
If yes, for what purposes? Please provide comments.
BA pension rises followed RPI until 2011 when the switch was made by the trustees to CPI. BA Pension Trustees still aspire to provide (the usually higher) RPI rises in the future and had proposed a rise halfway between the relevant RPI and CPI rises in April 2015 for the Airline Pension Scheme. This has resulted in a court case between the BA Pension Trustees and British Airways owners IAG, to take place in early 2016.
Most BA pensioners would prefer the higher RPI rises; arguably some current BA workers would prefer the lower CPI rises (as that would slightly better protect the two pension schemes if RPI rises remain higher than CPI rises). However the Trustees had a solvency plan, just before 2010, which used future RPI rise assumptions and this was agreed by BA and its Pensions Trustees
Q7 Do you agree that the following indices should be discontinued? (Please select those that you suggest should be discontinued)
• Tax and price Index
• RPI pensioner indices
• Component indices of the RPI
• Any other RPI index
Why? Please provide comments.
Answer: The issue for BA (and probably other) pensioners is that RPI is currently rising about 1.0 percentage points a year higher than CPI. We accept RPI is probably flawed but have not seen CPI shown to be better. This increase in the average gap between CPI and RPI annually now being 1.0 percentage points, the reason for this gap being mostly the changes in the method of collecting clothing data, and this gap generally being bigger in UK than in most other countries, leads us to argue both RPI and CPI/CPIH should be discontinued to be replaced by an index that better addresses these accuracy problems.
Q8 Do you have any views on what 'freezing' changes to the RPI should mean in practice?
If RPI is flawed, it should not be used. We are not convinced it is flawed; there remain strong academic arguments in favour of RPI, over CPI, from Dr Mark Courtney and others. As RPI’s use is embedded by legislation (eg for gilts), then either it should be replaced by a less flawed index (RPIJ, CPIH) or its methodology should be changed to remove the flaws
Q9 Are the priorities identified by ONS in its forward work plan appropriate?
We need an index, for example a Household Inflation Index, which better measures our inflation. In the meantime work should concentrate on reducing the “formula effect” difference between RPI and CPI
Q10 Should ONS include council tax in the CPIH?
Council Tax does not depend on income, so it should be included in CPIH.
Vacancy for Elected APS Trustee - ABAP Committee Supports Tom Mitchell
As the consequence of the retirement from British Airways of Tom Mitchell, who is the last remaining APS active member Trustee, a vacancy has arisen for an elected APS Trustee. When approached as part of the replacement process, no active member (current employee) volunteered to serve as a Trustee so, under the APS Rules, all pensioners and current employees have now been invited to put themselves forward for election.
It is to be stressed that it is the duty of a Trustee to act in the best interests of all beneficiaries whether active, deferred or pensioners.
Tom Mitchell has indicated to the ABAP Committee that he would like to continue as a Trustee. In view of current circumstances with the Triennial Valuation in progress and the 25-day case that BA is bringing against the Trustees in February 2016 in which Tom is a named defendant, the ABAP Committee has decided to support Tom as ABAP’s preferred candidate on this occasion.
Tom is a fully trained Trustee who has already given over seventeen years of service as a Trustee.
Occupational Pensioners Alliance AGM
Ray Smith attended the A.G.M. of the Occupational Pensioners Alliance on 28th May at Sunbury on Thames and was elected to the Committee as the A.B.A.P. representative. Ray is putting together some notes for the Newsbrief due out later this month.
Pensioner-Elected Trustee Election - Phil Hogg elected
Arriving on the website somewhat belatedly we are pleased to report that Phil Hogg has been elected as the new APS pensioner-elected trustee. He received 4439 votes. Stuart Scott received 4354 votes and Aidan Brown received 930 votes. Thank you to all three candidates and congratulations to Phil Hogg who was the candidate supported by ABAP and Mike’s List
Ian Heath and Mike Post attended a public meeting in London on 25 February, where Paul Johnson presented a summary of his 228-page report into Consumer Price Statistics. The report recommends the phasing out of RPI and RPIJ (which is essentially RPI but using geometrical means as used in CPI). It says CPI is a good index (to reflect the cost of living and for use in monetary targets), but CPIH is the one that should be adopted and developed in the UK, as it has housing costs and its methodology would be under UK, not EU, control, allowing further development more relevant to the UK. It points out there are bigger differences between price inflation between poorer and richer people (prices for the poor generally rise more) than any difference between CPI and RPI (the CPI rise per year was roughly 0.5 percentage points more than the RPI rise, though this is now closer to 1.0). However, it argues against the introduction of further indices (for example the RPI/CPI user group proposes a ‘household inflation’ index).
The review does suggest ONS should produce annual inflation figures for different sub-groups (pensioners, those on benefits, etc.) for 'analytical purposes'. There was an audience of about 80: journalists, actuaries, academics, pensioner and trades union representatives. A general view expressed was that, although RPI has its flaws, so do CPI/CPIH and many were unconvinced that CPI(H) better represents the inflation experienced by, for example, pensioners, than RPI does. Mike Post made the point that the BBC and others usually prefix ‘fracking’ with the word ‘controversial’, but we never hear of the ‘controversial CPI’ in the media!
Many thanks for all the continued support.
NewsBrief 99 is now available for download by clicking here
As many of you will be aware Ian Heath has been doing sterling work on your behalf in the area of Consumer Price indices - CPI and RPI. This topic can get very technical, and papers on it are often lengthy, but Ian summarises very well for those amongst us who have a view of the big picture, but cannot grasp all the fine detail.
He has recently summarised two papers. I include his notes here, plus links to the papers concerned:
"At the last ABAP committee meeting I promised a summary of 2 papers on the RPI/CPI methodologies. Here it is. They both argue against the CPI's methodology.
The first paper is by Mark Courtney: the link is here, “Consumer price indices and the identification problem”. The file can be viewed or downloaded.
Consumer Price Statistics (eg CPI) assume a stable system of customer demand and that price movements are due to supply-side changes; geometric mean is hence best for aggregation: My example: we have 2 types of clothing. One has a price rise of 9%, one a rise of 1%. We don’t know how many of each are being sold, only the prices. The multiplicative price rises are 1.09 and 1.01 respectively. We estimate the average price rise for this clothing item using an arithmetic average (1.09+1.01)/2=1.05 or a geometric average (the square root of 1.01*1.09, =1.04924). The geometric average will never be more than the arithmetic average. CPI calculations use a lot of geometric averages, RPI uses none, so CPI rises will never be more than RPI rises. Courtney argues demand-side changes also important in generating price movements.
We generally cannot distinguish between supply or demand influences on price movements. Hence, Courtney argues, arithmetic average is better than geometric. (ie RPI better than CPI) (Me: we need these geometric/arithmetic averages when we have a range of prices for a good but do not have data on the sales of these goods). The supply-side argument says that there is constant demand for a good and a consumer will (partially) substitute to a similar product whose price has risen less. The arithmetic average estimate of overall price rises would therefore give the consumer too big a rise (as they have substituted down whilst consuming the same amount, so would have money left over) If the quantity bought is in inverse proportion to price (eg price rises by 1%, you consume 1% less, so overall spend the same amount of money) then the geometrical average gives true cost of living index. In this case the price elasticity is -1 (a rise in prices of 1% leads to a fall in demand of 1%).
If the quantity bought does not change, regardless of the price change (eg price rises by 1%, you consume 0% less, so overall spend 1% more money) then the arithmetic average gives true cost of living index. In this case the price elasticity is 0 (a rise in prices of 1% leads to a fall in demand of 0%). Courtney says there is little evidence on size of the price elasticities (and hence safer to assume elasticity of 0, not -1)
There is also political pressure for “lower inflation”, (eg it drives wage demands) so CPI preferable to RPI (for those making the political pressure) demand-side changes (fashion, advertising, brand awareness) mean observed price changes identify stable supply. Demand shift is big in culture, entertainment, clothing. UK clothing statistics showed an implausible long-term decline in clothing prices; even though we now (since 2010) have better measurement. This calculated price decline is much bigger in women’s than men’s clothes. This larger price movement in clothing (than is other goods) has been a big contribution to the smaller CPI rises compared to the RPI rises
We therefore need better classification of goods. Eg need to separate full-price and sales-price clothing into different categories, need to have the sets of clothing in a category to be similar unit prices.
Mark Courtney also mentions this paper:
“Elementary Aggregate Indices and Lower Level Substitution Bias” Link here.
It estimates elasticity of substitution on alcohol consumption. It finds that the estimates of substitution are insufficient to back geometric mean or arithmetic mean arguments (in price statistics). Demand-side effects not being accounted for could explain this. The analysis was based on UK scanner data from Jan2003 to Oct2005
It concludes: “Estimates of substitution behaviour are insufficient for informing the choice index formula at the Elementary Aggregate level, which in part may be due to the presence of demand side effects that are not accounted for.”