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.”
RPI vs CPI - British Airways launches legal action against its pension trustees
From the Sunday Telegraph 8th December 2013: "British Airways has launched a legal action to try to block the trustees of its deficit-laden pension scheme increasing the amount the airline must pay into the scheme." Link to the article here. Don't forget to add a comment - the recent article in Professional Pensions got more comments than they had ever had, so let's repeat that.
RPI vs CPI - small claims court update
Unfortunately it now appears that the court in Salford had made some sort of administrative error, and had not realised that BA had acknowledged service of the claim. The default judgement has therefore been set aside, and the facts of the claim will now be examined by the court.
RPI vs CPI increases - first small claims court decision
As many of you will know some 50 APS pensioners are in the process of taking BA Pensions through the Small Claims Court process to get increases linked to RPI after their decision to link increases to CPI (when the Trustees had the option of retaining RPI). Captain Ian Fullalove (the Telegraph got his name wrong) has been successful: BA have been ordered to pay £1,200 to Captain Fullalove. We should add that BA are applying to have that claim put aside.
Link to the Telegraph article here, and Professional Pensions' version here. It is interesting to note that in the second article it is said that BA failed to submit a defence.
One of our regular correspondents has written to us wondering whether the amount spent by BA defending Captain Fullalove's claim exceeds the cost of restoring his rightful increases...
NewsBrief 94 is now available for download by clicking here.
It contains a commentary from our Chairman concerning the forthcoming Trustee elections, and updates on the VPO issue, the fight to restore RPI, and the ABAP input to the UKSA and ONS reviews. There is also a reminder about subscriptions - yes, it's that time of year again!
RPI calculation to remain unchanged
There will be no change to the methodology used to calculate RPI (which is what ABAP wanted). However, the proposed modified RPI calculation, bringing it closer to CPI, will still take place, to form yet another index, RPIJ.
There were 99 organisations' replies to the Office for National Statistics consultation; ABAP's was one of these. There were also 307 individual replies. Over 80% of each of the organization and the individual replies favoured no change to RPI.
Hence, RPI, which ABAP wants BA Pensions to use instead of CPI in the APS and NAPS inflation calculation, keeps its calculation method. ABAP has argued that it is wrong to just look at RPI methodology, while implicitly regarding CPI to be a perfect measure of inflation. Both RPI and CPI need improving.
It will be interesting to see what happens when RPIJ, whose annual rise will be about 0.3 percentage points above CPI’s, starts to be published from 19 March 2013. RPI’s annual rise remains about 1.0 percentage points above CPI’s
The full announcement, made on 10 January 2013, can be found in the following link: http://www.ons.gov.uk/ons/rel/mro/news-release/rpirecommendations/rpinewsrelease.html
NewsBrief 93 is now available for download by clicking here.
ONS RPI Consultation
As reported earlier on this website ABAP has responded to the ONS RPI Consultation on your behalf. The ONS says RPI calculations should be changed to bring it closer to CPI, whose calculations would remain the same.
The ABAP response to this ONS proposed change to RPI is that we need to improve CPI as well as RPI, and hopefully bring them much closer together (so that our having our pensions rise in line with the generally lower CPI rises is less of a financial burden to us).
We have gone for the no-change (to RPI) option, as our response argues it is wrong to say CPI is correct and that only RPI is wrong.
ABAP therefore says both RPI and CPI calculations need improvements.
Our response was sent to ONS on Friday 30Nov. You can read the full response here.
APS Postal Ballot vote
The Rule 25 Ballot papers have started arriving in the mail.
Please vote ‘Yes’ to all three questions.
The reasons for voting ‘Yes’ are:
Q1. We wish to retain the full RPI increases that we paid for over our working lives. The majority of us (those who were still working in 1984) rejected large lump sum cash payments offered to join NAPS, choosing to stay in APS which, the late Lord Marshall informed us, would receive unlimited inflation proofing in line with the cost of living index. By rejecting those bribes to leave APS, we paid twice over for our RPI inflation protection.
Q2. If the APS trustees do not retain a funding target sufficient to pay RPI increases in the long-run, the money will be unlikely to be there to pay RPI increases.
Q3. When the APS trustees took the decision to pay CPI increases in 2011, 5 of the BA appointed APS trustees were also NAPS beneficiaries and NAPS trustees. In a situation where APS and NAPS are in competition
for money from BA, the impossible position of conflict is obvious.
ONS RPI Consultation
There are proposals, published on 8 October, from the Office for National Statistics (ONS) to change some of the calculations behind the Retail Price Index (RPI). There are various options proposed, most of which will reduce the RPI increases in future to be much closer to the CPI ones. You will probably know that the annual rises in the currently-defined RPI (the index we want our pension increases to be based on, like they used to be) are forecast to be roughly one percentage point a year higher than the annual rises in CPI (the index that our pension rises are now based on).
If RPI represents true inflation, then someone getting a £10,000 a year pension, increasing by RPI for 20 years, will receive a total of £200,000 in today's pounds.
However, if the annual pension increase is by CPI, and the CPI rise is roughly one percentage point lower each year than the RPI rise, that £200,000 received over 20 years becomes £180,272, in today's pounds.
We are still fighting for our pension increases to be restored to RPI. However, if RPI becomes very close to CPI anyway, we would lose out with either CPI or the new RPI.
The consultation document is a bit heavy in parts but is well-written and has some very illustrative graphs and good worked examples of the different calculations used.
ONS wants feedback by 30 November. Feedback can be from individuals or groups, so ABAP will be replying.
We will run the same ABAP feedback process as last time: please send emails or post to me, I'll reply to emails and copy in the ABAP committee. From this the ABAP response will emerge. Our deadline for feedback from you is 16 November. I'll co-ordinate an ABAP reply, which we will put on our website on 23 November and send to ONS.
My email address is firstname.lastname@example.org
The consultation document is available here.
NewsBrief 92 is now available for download by clicking here.
We have also provided a template letter to use for your appeal if your complaint against the use of CPI is rejected by the Trustees. This can be downloaded here.
The E-petition calling for a debate on the switch from RPI to CPI received over 107,000 signatures. John McDonnell MP for Hayes and Harlington, put the case for a debate to the House of Common Back Bench Business Committee and the debate took place at the beginning of March. Nothing concrete appears to have changed as a result, but many good points were made in the debate, criticising the change to CPI, and supporting our arguments.
The transcript (Hansard) of the debate, and video footage from Parliament TV can be seen by following this link.
NAPS Postal Ballot and NAPS Trustee Election Results
The results of both the Postal Ballot and Trustee Elections have been published by BA Pensions. For full details, where the results can be seen as .pdf files, follow this link, but to sum up:
Pensioner Trustee Election
The NAPS Pensioner membership elected Mr Graham Fowler as a Trustee. 18,069 ballot forms were sent out and 6,853 votes were cast by post, internet and telephone voting.
Graham Fowler received 2,578 of the votes cast;
Nikki Jones received 1,556;
John Kennedy 1,049;
Andy Webb 825;
Marilyn Leather 621;
Raj Tangri 224 votes.
Congratulations to Graham Fowler, whose term of office commenced on 9 February 2012.
NAPS Rule 27 (b) contains provision for Members and Pensioners to request the Trustees of NAPS to undertake a postal ballot. As per the requirements of Rule 27 (b) 100 written requests for a ballot were received from NAPS Members and Pensioners. The requests detailed the four questions to be included in the ballot to be sent to all active Members and Pensioners in receipt of their pension. The ballot papers were despatched by post on 28 December 2011 with a close date of 31 January 2012. 44,497 papers were sent out, with 14,453 returned - a turnout of 32.5%.
The four questions asked and the responses were as follows:
Question 1: Do you agree that the NAPS Trustees should exercise their powers to influence BA into agreeing to a supplementary deed to clause 16 of the NAPS Scheme Rules giving Trustees discretionary power to award discretionary benefit increases as per rule 15 of APS, thus maintaining parity with APS?
Number voting YES ........................... 13,675 (94.7%)
Number voting NO ............................. 519
No vote ........................................... 241
Spoilt vote ....................................... 1
Question 2: Annual increases in NAPS pensions have been based on the Government’s Annual Review Orders which, until the June 2010 Budget, used the year-on-year increase of the Retail Price Index (RPI) in September to increase pensions. In the 2010 Budget the Chancellor changed the index he used from RPI (Retail Price Index) to CPI (Consumer Price Index). CPI was only introduced in 1996. Since its introduction, CPI has only been higher than RPI during September on four occasions. Accepting that in the occasional year CPI may exceed RPI, but that the history and the expectation is that RPI will usually be higher than CPI (last September it was 1.5% higher). Do you agree that it is in the best interests of NAPS beneficiaries that the Trustees should amend the NAPS Trust Deed and Rules so that in future annual increases are not determined by the Government but are “hard-wired” to RPI so that all NAPS beneficiaries can continue to receive RPI increases?
Number voting YES ........................... 13,548 (93.8%)
Number voting NO ............................. 661
No vote ........................................... 226
Spoilt vote ....................................... 1
Question 3: Do you agree that the NAPS Trustees should retain and continue a funding target sufficient to pay RPI Pension increases?
Number voting YES ........................... 13,715 (95%)
Number voting NO ............................. 476
No vote ........................................... 244
Spoilt vote ....................................... 1
Question 4: Do you believe that the NAPS Trustees should restore RPI increases with immediate effect and the increases back dated to April 2011, thus meeting member’s expectations?
Number voting YES ........................... 12,997 (90%)
Number voting NO ............................. 1,270
No vote ........................................... 169
Spoilt vote ....................................... 0
Jaguar Land Rover restores RPI link for all members
From Professional Pensions, 18 Jan 2012, By Jack Jones
Jaguar Land Rover has restored the link to the Retail Prices Index for 1,000 of its pensioner members after union negotiations.
Former Ford employees from the firm’s Halewood plant previously had their benefits linked to the Consumer Prices Index after the government’s decision to switch inflation measures used for uprating benefits.
These ex-workers had contracts which mirrored pay and conditions at Ford. When Ford changed indexation measures for its own scheme in response to the new legislation, Jaguar Land Rover did the same for this section of the membership.
Other members of the scheme had RPI-linking ‘hard-wired’ into the scheme rules and their benefits were unaffected.
But following negotiations with Unite, the firm said it had agreed to reinstate RPI as the measure of inflation used to calculate future benefit increases for all members.
Unite national officer Roger Maddison said: “This shows that Jaguar Land Rover is not limited to mirroring Ford’s terms for these workers – they can go beyond that if they want to.”
A spokeswoman for the company said: “As a result of regular conversations with Unite, we have aligned the benefits for workers in Halewood with the rest of the workforce.”
Last year both indexes were above the scheme’s 5% cap and therefore the change did not make any difference.
But the Office for Budget Responsibility has forecast that the CPI will be on average 1.4 percentage points a year lower than RPI – potentially slashing 18% from the value of members’ benefits.
Good news for JLR workers, and good that the company has chosen to use RPI, just as BA pensions are able to do. However, please note that figure in the last line - 18% might be lost from your pension if CPI remains in force, and also, remember that every year that CPI is in place you lose money that will never be recovered (unless BA pensions retrospectively revert to RPI, which seems unlikely given their present stance).
e-Petition to reintroduce RPI
Members might like to know that the above petition, which can be found at direct.gov.uk, now has (as at 3rd January 2012) over 105,000 signatures - it only needed 100,000 to get a debate in Parliament, so well done all! Watch this space!
September CPI & RPI figures, likely 2012 increases, and Dr Ros Altmann's view on pensioner inflation
Sandra Sellers has advised that September numbers for inflation indices are CPI 5.2% and RPI 5.6%. If things remain as they are this means that the APS increase due in April 2012 will be 5.2%, and NAPS 5%.
Ros Altmann & Saga have recently calculated that those aged between 50 and 64 are suffering real inflation of 6.6pc, while those aged between 65 and 74 are seeing prices rise by 6.4pc. In other words, whichever BA scheme you are in, and, regardless of the index applied, your real purchasing power is declining. A sobering thought.
CPI vs RPI
Members should all by now be familiar with this key element of the argument: Is CPI an appropriate index for APS? ABAP, via Mike Post, has taken expert advice from Mark M Courtney, D.Phil. (Oxon), formerly Deputy Director and Head of Economics, Regulatory Impact Unit, Cabinet Office, some time Senior Lecturer in Economics, Rhodes University. Dr Courtney has written a paper which covers the background and history of the CPI: what its purpose was and how it was developed; the details of the CPI‟s construction and how it performs as a price index in practice; He then draws conclusions about CPI's appropriateness for cost-of-living adjustments.
His conclusion is that: "The CPI as currently calculated in the UK exhibits a significant and systematic under-estimate of the overall cost of living, because it does not cover owner-occupied housing. It also exhibits a significant and systematic under-estimate of the cost of living because it uses the Geometric mean for first-stage aggregation in the context of a price collection and sampling system that was designed and developed for a different technique of first-stage aggregation, namely the Average of Relatives. This means that the CPI is not an appropriate index for the Airways Pension Scheme to use in order to measure and adjust for changes in the cost of living"
A copy of Dr Courtney's report has been sent to the Trustees.
The full report, in .pdf format, can be downloaded by following this link.
Early Day Motion
To date, 133 MPs have signed Early Day Motion 1032 which calls for a postponement of the use of CPI for the indexation of benefits and pensions until its appropriateness has been fully evaluated. And they are still signing; the most recent signature is dated 13/07/2011. The full EDM reads:
"That this House notes the Government's proposal to use the Consumer Price Index (CPI) rather than the Retail Price Index (RPI) for the price indexation of benefits, tax credits and public service pensions; further notes that the CPI is consistently lower than the RPI; expresses concern over the impact that this will have on the incomes of pensioners and other vulnerable groups; recognises the concerns held by the Royal Statistical Society and the UK Statistics Authority that CPI excludes many housing costs which are borne by the majority of pensioner households; and calls on the Government to take these concerns into account and postpone the change from RPI to CPI until the appropriateness of CPI as a measure of price increases borne by pensioner households can be fully evaluated."
Has your MP signed EDM 1032? Go to http://www.parliament.uk/edm/2010-12/1032 for the full list of signatories.
If your MP has not signed, why not write to ask him or her why they have not signed? You can find details of your MP at http://www.theyworkforyou.com/
APS RPI Campaign - take action now!
It is now time to start the campaign against the APS Trustees for the imposition of CPI pension increases. Part 6 APS beneficiaries should now submit individual complaints to the APS Trustees, as explained and set out here.
APS Trustee Election results: Member Representatives
The APS Pensioners have elected Captain Cliff Pocock, Mr Paul Douglas and Mr Graham Tomlin as Pensioner Trustees. Votes cast were as follows:
Captain Cliff Pocock
Mr Paul Douglas
Mr Graham Tomlin
Miss Caroline Gill
Mr Alan Pope
Mr Ian Heath
Mr Aidan Brown
Total votes cast
Well done to all three, and thanks to all APS members for their informed support! ABAP also wants to thank those other candidates who stood but were not elected on this occasion. It is clear that they are all of the highest quality and we are fortunate indeed that they decided to put themselves forward for the onerous task of being a trustee. It is to be hoped that they will involve themselves in the activities of ABAP so that ABAP can continue to be a major force for good in protecting APS pensioners’ rights and interests.
You can now donate to the ABAP Fighting Fund online. Click on the Fighting Fund menu button on the left-hand side of the page, or click on this link.
BA CPI/RPI in the press Sunday 10th July 2011
There are three good articles in today’s newspapers about the APS scandal.
These are in The Sunday Telegraph, B6, “BA faces fresh challenge over pension cut”, The Mail on Sunday, page 82, “The pension index rebellion” – sorry about the picture! – and The Observer, “British Airways flies into new storm over chancellor’s pension increases”.
All three articles are good. However, the Telegraph and Observer journalists fall into the common trap of stating that the reason that CPI is normally less than RPI is because the CPI does not include housing costs.
The truth is materially different. Less than 10% of the difference is down to the exclusion of housing costs from CPI. Most of the difference, 92%, is because CPI does not simply compare the cost of items now as against the previous year, as RPI does, but makes adjustments downwards assuming that as some prices rise people will switch to cheaper products. This is fine if you want to understand how much the change in national economic activity
is down to price increases and how much is genuinely change in the volume of activity, but it is a swindle if you are trying to preserve spending power. For those who want a source of this information, it is all in the Impact Assessment that accompanied the Government’s recent Pensions Bill. This shows that the Government is forecasting the difference between CPI and RPI to average 0.87% of which 0.07% will be housing costs and 0.8% will be driven by the trading down effect, what is often called the “formula effect”. You will also hear statisticians talk of geometric averaging for CPI and arithmetic averaging for RPI.
Many of you have written to your MPs, thank you. It is by working together that we will defeat the outrage that has been perpetrated on our pensions. The MPs have often written to Steve Webb, the Pensions Minister. His standard reply to MPs gives the game away so far as the APS trustee board is concerned. Mr Webb writes: “The methodology uses to calculate CPI takes into account the fact that many people tend to trade down to cheaper goods when prices rise – the RPI does not. This contributes a significant portion of the gap between the CPI and the RPI and is known as the ‘formula’ or ‘substitution’ effect.
We know, and the APS trustees should have informed themselves, that the CPI is not, and was not, designed to uprate pensions. Its effect when used to uprate pensions is, as the Pensions Minister explains to MPs, to drive down the standard of living of pensioners. Now that is fine for the Government to do that, if they so wish, they must account for their actions to the public sector workers and to the electorate. But the APS trustees are in a different
position entirely. They are required to act in the best interests of their beneficiaries. In contrast to NAPS, the APS trustees have the unique, unilateral power to do this without BA’s consent. The APS trustee board must be held to account for their failure to retain RPI increases.
Incidentally, the fact that the Government is forecasting a difference of 0.87% between CPI and RPI means that the present value of APS pensions lost to us will be nearer £400 million than the more conservative £270 million shown in the BA accounts.
If you are coming to Ascot tomorrow, please remember to bring your tickets!
Newsflash 17th May 2011 - ABAP Video - Jamie Bowden interviews Pocock, Post and Tomlin
You may now see on a video of former British Airways press spokesman, Jamie Bowden, interviewing Cliff Pocock, MikePost and Graham Tomlin. They are the three trustees who recently resigned from the APS trustee board over the failure of the APS board to act in the best interests of the APS beneficiaries. The board recently voted not to continue to pay RPI increases.
Please share this with your friends!
...and if you should feel the need to write to your MP about this, click on this link to go to TheyWorkForYou.com. It is an easy way to find out who your MP is, and how to contact them.
We have been pleasantly surprised, and a little overwhelmed by the recent surge in membership applications, particularly those made on-line. Please don't worry if you don't hear anything for a little while: all applications are being processed, and membership cards will be despatched asap. We are also collating forms from those applicants who indicated that they might be able to give some time to ABAP, and/or stand as a Trustee, and those will be discussed at our next Committee meeting in May - we will get back to you!