State Pension Reform & the Guaranteed Minimum Pension (GMP)
As we have written earlier, this topic is complicated, but the effects on individuals' pensions are potentially significant, and it seems that the implications are only now becoming clear to those most affected. We have set up a section on the website with information devoted to the topic. Please click here. There are links to other sites there too.
Former Staff Healthcare
We have been asked by Nigel Carey of the BA Former Staff Liaison Council to help publicise the recent change in BA's healthcare provider from BUPA to AXA. BA and BA Clubs are now promoting AXA to current staff who attend the pre-retirement courses, as well as to all current and former staff.
Many of you are in the so called ‘group scheme’ for former staff because you transferred immediately, on retirement, from employment cover. If you are one of those people in the ‘group scheme’, you will by now have received a leaflet from BA Clubs promoting AXA. You should pay particular attention to the lower message with the red border, on the right hand side of the information sheet. BUPA renewal is due on the 1st May 2016. You may wish to continue with BUPA alternatively you may want to switch to AXA PPP healthcare.
Follow the instructions to get a quote from AXA PPP by ringing 0800 313 4935 or visit axappphealthcare.co.uk/baclubs/switch. There is more information is on BAclubs.com, and on the BA Touchdown site under Benefits.
Template letter to your MP
In NewsBrief 102 we requested as a matter of urgency that you should write to your MP about how BA misled MPs about the consequence of the APS Trustees returning to the payment of RPI increases by 2023 in linear steps as agreed in the 2012 Triennial Valuation Assumptions, and mentioned the attachment of a template letter...and then did not provide the letter with the NewsBrief! You can find it in MS-Word format here. Please mention it to friends, and if you can download a copy for someone less PC-literate that would help.
NAPS Trustee elections
Dr Jack Wheale has been elected as a Member Nominated Trustee from the Pensioner constituency of NAPS following a ballot. Congratulations to Jack, and thank you to the losing candidates - David Chinn, Duncan Holley and Marilyn Leather for putting themselves forward for an onerous and responsible job.
The Term of Office is for between five and five and a half years and commences on 1st April 2016.
State Pension Reform & GMP
This article should be read carefully if you will not have reached State Pension Age by 5 April 2016. If you are already in receipt of a State Old Age Pension on 5 April 2016, you are not affected.
By now, most of us should be aware that the state pension system is being reformed from April 2016. The current two-tier system with the basic state pension and SERPS (now known as the state second pension) will be replaced by a new simplified single-tier state pension.
At the same time, contracting out for all defined benefit pension schemes ceases, the effect of which for active members of APS & NAPS was outlined in the December newsletter.
From 6th April 1978, employers and employees were permitted to contract-out from SERPS provided their occupational pension scheme met a set of criteria known as Guaranteed Minimum Pension (GMP). This reduced state expenditure on SERPS and the benefit in return was a reduction on employers’ and employees’ National Insurance contributions. This was attractive enough to cause concern about the government being able to process the considerable number of applications in time for the start of the new tax year.
British Airways contracted out APS as it readily met the GMP criteria. Subsequently, when NAPS was introduced in 1984, it too was also contracted out right from day 1. Those of us who currently receive APS or NAPS pensions or who will eventually receive APS or NAPS pensions and reach state pension age on or after 6 April 2016 will have part of their annual BA pension inflation rise reduced. Those who reached state pension age before 6 April 2016 are not affected. Here is a summary of what we think will happen and a few examples.
Being contracted out, APS and NAPS have to guarantee to pay their members a pension from the qualifying GMP age (65 for men, 60 for women) of at least as much as the earnings-related State benefit they would have built up had they not been contracted out. This amount is known as the Guaranteed Minimum Pension. GMP is not in addition to our APS/NAPS pension but included within it.
GMPs cover two periods:
• Pre 88: 6 April 1978 to 5 April 1988
• Post 88: 6 April 1988 to 5 April 1997
If you did not work for BA in these periods, your APS/NAPS Pension is not affected.
For those reaching State Pension Age on or after 6 April 2016, once they reach GMP age, APS/NAPS will no longer be responsible for increasing Pre 88 GMPs, and for Post 88 GMPs APS/NAPS is only responsible for any increases due up to 3% a year.
Under the current State Pension arrangements, from State Pension Age (SPA) the State assesses the earnings related pension that would have applied had the member not been contracted out (referred to as the Additional Component (AC)). When the State pays annual increases, the increases apply to the total AC amount which in effect broadly provides for increases on an amount equivalent to the Pre 88 GMP and any increases over 3% a year on the Post 88 GMP. These increases apply from the state pension age rather than the GMP Age. As SPA can be later than GMP Age, there can already, under current State Pension arrangements, be a period of time during which the GMP portion of an APS/NAPS pension is not receiving equivalent increases from the State.
The introduction of the New State Pension (NSP) from 6th April 2016 removes the concept of contracting out and the AC, and replaces these benefits with a single flat rate State Pension. Consequently, as there will no longer be an earnings related element of the pension, the State will no longer apply annual increases in the manner described above. Future increases will instead be applied by the State to the NSP amount. APS/NAPS will continue to pay increases required by legislation on GMP amounts until GMP Age.
BA Pensions say the Government maintains that most individuals will be better off under the new arrangements: the NSP is higher than the current State Pension and both now will rise with a ‘triple lock’ guarantee (the highest of the CPI increase, the increase in National Average Earnings, or 2.5%). The Government believes that these two elements will, for most members, mitigate the loss caused by the State no longer increasing the relevant amount to one’s GMP.
However, APS/NAPS members reaching State Pension Age shortly after April 2016 will have limited time to build up NSP by paying National Insurance (NI) contributions or securing NI credits. There is an obscure calculation applied that seems to result in many who contracted out receiving a state pension amount equivalent to the old state pension, not the higher new state pension!
This is all very complicated, so here are some real examples.
Persons A, B and C worked for BA over a time period that included the entire Pre88 and Post88 periods (ie 6 April 1978 to 5 April 1997). Their Pre 88 GMPs are £2,938, £2,610 and £1,887 respectively. From 6 April 2016 that amount of their annual APS pension will rise by 0%, not CPI, once they have reached GMP age (this remains 65 for men, 60 for women), for the rest of their lives. Their Post 88 GMPs are £1,885, £2,040 and £1,628 respectively. From 6 April 2016 that amount of their APS pension will rise by CPI capped at 3%, once they have reached GMP age, also for the rest of their lives. Person A is 65 this August. If he lives another 20 years and CPI inflation is always 2% a year, he would lose about 3.6 months’ APS pension due to the GMP effect. If he lives another 20 years and CPI inflation is always 4% a year, he would lose about 9.2 months’ APS pension due to the GMP effect.
Person A and Person B reach state pension age in August 2016 and November 2016 respectively. Both their state pension quotes from the Department of Work and Pensions are at the old (ie current) state pension level, not the new state pension, due to their contracting out.
These 3 examples have good APS pensions. The ABAP committee is more concerned about those on lower APS/NAPS pensions. If their GMP is a higher proportion of their total APS/NAPS pension than our 3 examples, then the GMP effect will be bigger; more months’ pension will be lost than the 3.6 months (2% CPI inflation) or 9.2 months (4% CPI inflation) for Person A.
BA Pensions stresses that the APS/NAPS rules have not been changed. The change has been made by the Government, not the BA Pension Trustees. BA Pensions is liaising with the Pensions and Lifetime Savings Association and the Department of Work and Pensions on this issue.
In summary, if you reach state pension age on or after April 6 2016:
• Your full APS & NAPS pension will increase by whatever annual rises are applied, up to age 65 for men and age 60 for women
• Subsequently, the GMP built up from 6th April 1978 to 5th April 1988 will cease to increase and the GMP built up from 6th April 1988 to 5th April 1997 will increase by a maximum of 3% per year.
• Having been contracted out, BA staff will most likely begin with an entitlement to the foundation rate of the new state pension (currently around £116 per week). Up to state pension age, additional state pension can be earned (up to the full amount, expected to be around £155 per week) by making qualifying National Insurance contributions from any form of UK employment.
While reform aimed at simplifying a complex pension system is welcome, it’s apparent that there are significant losers in the process. Of particular concern is the discriminatory nature of the GMP ages for men and women.
The GMP calculations are complex and members who are affected by this are advised that whilst BA Pensions should be able to give general guidance on what their individual position may be on reaching GMP age, specific personal projections cannot be provided because not all the factors involved in individual calculations will be known. In a low inflation era, the effect of GMP may seem insignificant but as we well know from the RPI vs CPI debate, the effect of compounding is considerable. Should inflation increase, then the effects of GMP become very much greater.
If you want to contact The Department for Work and Pensions for questions about the new State Pension or to ask for a statement you can ring the number shown in this link: https://www.gov.uk/future-pension-centre, Monday to Friday between 8am and 6pm.
APS Pensioner-elected Trustees
We are delighted to report that Frances Axford and Ian Heath, the two candidates supported by both ABAP and separately by Mike’s List, are to be the next APS Pensioner-elected Trustees. Their terms of office starts on 1 April. Since they were the only candidates for the two vacant positions, there will not be an election. ABAP would like to thank them both for undertaking their arduous roles.
A drawback of there being no requirement for an election, if past practice is followed, is that BA Pensions will not publish the candidates’ Election Addresses. They are therefore published below so that you can be confident in your new Trustees. The ABAP Committee was pleased to meet Frances Axford in the New Year. Ian Heath has been an ABAP Committee member for some years. The Committee is confident that both Frances and Ian will make excellent Trustees.
For the avoidance of doubt, I should like to reiterate that the ABAP Committee fully understands that a Trustee’s duty is to act impartially for the benefit of all scheme members. In supporting the election of any individual Trustee, ABAP seeks to ensure that BA pensioners have the best person for the position. The main qualification for a Trustee is soundness and the main asset is common sense. The ABAP Committee fully understands and accepts that it has no control whatsoever over any Trustee.
Election Address of Frances Axford
I am a pensioner of APS living near Oxford and I joined BOAC in 1969 after university.
At BOAC/BA I worked in Productivity Services, Market Research and Eastern Division, where my last position was Marketing Planning Manager.
I worked in Engineering, Commercial, Ground Operations, Flight Operations & Management Accounting in Productivity Services & both my Market Research & Eastern Division experience demonstrate competence in the Commercial Area.
In 1982 I left the airline to have a baby & subsequently worked in various freelance roles including teaching on the Open University’s MBA programme. In the early 1990s I trained as a chartered accountant with Grant Thornton, auditing a variety of large & medium sized businesses & moved on to work in industry. From 1997 to retirement in 2011 I worked for Unipart, a warehousing & logistics company in a variety of roles both client facing (including contract negotiation) and the full range of financial management.
My qualifications for a trustee appointment are that I have a BSc in Mathematics and am a Chartered Accountant.
I am standing for this position because I am keen to ensure active members, deferred members, pensioners and the dependents of APS receive the best possible deal from both the Airways Pension Scheme & British Airways within the terms of the Trust Deed.
In this regard my experience both as a Chartered Accountant & my career outside the airline industry would provide the Trustees with a relevant & wider skill set.
In particular I feel that these skills will be beneficial in relation to the RPI/CPI court case, & here I want to help achieve the best outcome.
The role of a Trustee is a weighty one and accountability for Scheme decisions rests with the Trustees. I realise I need to complete specialised training & am working my way through the Trustee Toolkit training as evidence of my commitment. I am about half way through this at the time of writing.
In sum, I hope that you will consider voting for me if you want a fresh face as a trustee who can offer both professional financial competence & varied working experience both inside & outside the travel industry and who will act with integrity, responsibility & independence on behalf of all members of the Scheme.
I would like to thank ABAP and Mike Post for their endorsement of my candidacy. END
Election Address of Ian Heath
I am 64 years old and retired from BA in September 2006. I live in Egham, Surrey with my wife Kwai Lin Lim, who is also an APS pensioner, and our 17-year-old son Stephen.
I have a BA degree in Mathematics from Oxford University, an MA in Operational Research from Lancaster University and, through BA, an MBA, also from Lancaster University.
I joined BA in 1974, in Operational Research (OR). I worked in a variety of OR areas for nineteen years with departments such as Scheduling, Corporate Planning, Revenue Accounts, Relationship Marketing, Brands, Sales and Cargo. I became an OR Manager. In OR, we use mathematical modelling and statistics to help evaluate the past and hence forecast the future under different scenarios. This helps BA make robust decisions on important areas such as schedules, pricing, booking policy and aircraft purchases.
In 1993, I moved to Revenue Management to coordinate and prioritise its various system developments that help optimise booking and pricing decisions.
I joined Fleet and Network Planning in 2002. I did much analysis evaluating the best future schedules, aircraft purchases, configurations, and possible alliances and mergers.
I have been a committee member of the Association of BA Pensioners (ABAP) since 2010 and represent it on the Royal Statistical Society’s RPI/CPI User Group, which lobbies for greater accuracy in both the Retail and Consumer Price Indices. I coordinated ABAP members’ feedback to the UK Statistics Authority (UKSA) reviews: on RPI and CPI, in 2012 and “Measuring Consumer Prices”, in 2015.
I am grateful for the support of ABAP and Mike’s List should there be an election.
Since retiring I have also stayed active by tutoring maths, writing maths A-level questions for one of the examining boards, cycling, playing football and running an allotment.
I am seeking election because I have long had an interest in APS. I built a deci sion support system in 1984 on the BA Dec10 computer to evaluate APS and NAPS options, given variable forecasts of future inflation, pay and life expectancy. Though certainly not a trained actuary, I understand the maths and statistics behind actuarial work.
If I am elected as a Pensioner Trustee of APS, my mathematics and statistics background will help me in that role. I would throw my full energy into the learning required. I understand the duties and responsibilities of a Trustee and would be honoured to become one. END
Late pensions payment
On Friday 27 November it became apparent from emails to ABAP that owing to an “administration error” APS pensions would not be paid to UK-based pensioners before 1 December. It is important to stress that this is an administration error and not a symptom of APS’s financial difficulties. Should anybody suffer financial loss or damage to personal reputation as a consequence of the late payment, please make sure that you advise BA Pensions so that you can be compensated. It appears that the pensions will be definitely be paid into banks on 1 December
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 email@example.com, 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.”