NEWSBRIEF No 90
11th December 2011
Contents:
1. CPI/RPI: Judges’ Decision
2. 3 Question Ballot Result
3. NAPS Trustee Election
4. RSS Report
5. VPO Update
6. Widows Trustee Vote
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1. CPI/RPI Judicial Review: Judges Decision 2 December 2011 (Capt Mike Post)
The Judicial Review was heard in the High Court from October 25 /27 before Lord Justice Elias, Mr Justice McCombe & Mr Justice Sales to determine whether CPI instead of RPI was a suitable index for the annual increase of public sector pensions. Although BA Pension Schemes are no longer part of a nationalised BA, Pensioners were indirectly involved as the OPA ( Occupational Pensioners Alliance)of which ABAP is a member was represented at the hearing.
The headline news is:“Unions lose High Court Challenge to the CPI Pensions Switch". However one of the three Judges, Mr Justice McCombe, dissented from the majority on one of the four counts and said he would quash the Orders under challenge. (He disagreed that CPI was more suitable because it had been in UK since 1996 without anyone using its alleged advantages over RPI on merit alone.- Ed.)
All three Judges accepted that the Trades’ Union argument that Mr Osborne’s move was more about Govt. deficit reduction, rather than as Govt. had claimed, a general belief that CPI was a more appropriate measure of inflation for pensioners than RPI.
According to the Trades’Union solicitors, Thompsons, an Appeal will be launched. I have been advised that a dissenting Judge in the first instance makes it more likely that an Appeal will succeed.
It is too early yet to report any considered reply by lawyers. The chairman of trustees, in a letter to several pensioners on 18th August 2011 has stated that APS trustees were waiting for information regarding the (public sector) Judicial Review before determining what action, if any, should be taken.
The APS scheme secretary in a letter to some pensioners on 24th November 2011 stated that the trustees had decided to review the outcomes of the Judicial Review before determining what action if any is required. Both letters ignore the 3rd February 2011 unanimous decision of the trustees to take any Final Decision on CPI/RPI before a Judge for approval. The trustees have provided no evidence that the 3rd February decision has been reversed.
The trustees claim that the minutes of trustee discussions on CPI/RPI require that they are not available for circulation“as such does remain confidential during these on going discussions.” The basis for this doctrine of confidentiality is unclear. During the extremely controversial 1999 trustee discussions about the ultimately failed Merger of APS & NAPS the minutes of the trustee meetings were routinely made available to beneficiaries. This was clearly in the best interests of the beneficiaries. Surely in matters of trust Transparency is All?
Finally, a piece of Good News. I understand that the newly appointed BA nominated APS trustees are no longer burdened with the onerous conflict of being NAPS beneficiaries.
Comment. ABAP knows that even using RPI, after a decade or so our pensions fail to maintain the living standard on which we retired. CPI is the lower index so it will be worse for us when we are older. The differences between RPI & CPI have recently been projected to widen as well. Why then are the BA schemes using CPI when it does not save Mr Osborne even 1p ?
After much hard work by the Trustees, they must stick to the Recovery Plan as laid down for both Schemes. It is easy to suspect that the savings accruing to BA from the Pensioners by the opportune use of CPI ( despite the signed agreement of the Recovery Plan) are to fuel-far-flung-Eldorado-expansion-plans.
But it is Christmas and these thoughts are unseasonal…
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2. Three Question Ballot of APS Members & Pensioners: Result (Dayne Markham)
Total Voters: 26178
Ballots returned: 13042
Turn out: 49.8%
Question 1. Must the trustees retain a funding target to pay RPI increases?
Yes : 93.68%
No: 2.90%
No vote: 3.42%
Question 2. Do you agree that the trustees should restore RPI increases with immediate effect back dated to April 2011?
Yes : 91.98%
No: 6.43%
No vote: 1.57%
Question 3. Do you agree that the action of the APS trustees in placing one sided arguments in the ballot packs is democratic interference of the ballot ?
Yes: 65.92%
No: 28.36%
No vote: 5.69%
The Ballot is not binding on the trustees, but the majorities on Q1 & Q2 leave no doubt of the Members & pensioners wishes. Q3. Although the majority in favour is, surprisingly, lower it still has given a clear answer and ABAP recommends that the trustees desist from slipping their pamphlets into ballot packs in future.
3. NAPS Pensioner Trustee Election. (Dayne Markham)
The balance of Actives to Pensioners in NAPS has swung to give another Pensioner trustee position. ABAP will inform NAPS members of our recommended trustee candidate after the closing date for submissions on December 20th.
4. Royal Statistical Society Meeting 18th November 2011: Report (Ian Heath)
An RPI/CPI group has been formed by The Royal Statistical Society (RSS). This results from the concern RSS people had raised over the growing use in the UK of CPI (Consumer Price Index), instead of RPI (Retail Price Index), for, amongst other things, pension calculations. The RSS contacted interested parties (pensioner trustees, pensioner-interest groups, actuaries, unions, RSS members, Office for National Statistics (ONS) representatives, academics). I attended an initial meeting on 18Nov11, representing ABAP. A committee has been formed to investigate the main issues that arose. I have joined this committee, whose first meeting will be on 12 Jan 2012.
This note summarises what happened at the initial meeting and what should happen next.
RPI was started in 1947, CPI started in 1996. CPI was needed as it was to be the common EU measure of inflation (ie each country used the same methodology). The commonality of CPI has been achieved, but where there was not agreement on price areas (eg the cost of mortgages, also council tax, both of which are included in RPI), the compromise was to leave them out (up to now). There are various other differences in the items that contribute to RPI and CPI, but they generally cover the same things.
In most EU countries, CPI (officially called the Harmonised Index of Consumer Prices (HICP)) is not used internally. Confusingly, some EU countries define and use their own CPI, which is different from HICP. UK and, I believe, Romania are the only EU countries that use the HICP/CPI internally.
RPI generally rises by more than CPI, certainly in the long term. For example, let us reset both RPI and CPI to 100 in April 1996 (when CPI itself started). By April 2011, 15 years later, CPI is about 136 whereas RPI has risen to 154; this is an annual average CPI rise of 2.1% compared to RPI’s average rise of 2.9%. Why has RPI risen around a further 0.8% a year than CPI? The difference in the mixture of items used is indeed a factor, but a fairly small one. Most of this difference is due to “the formula effect”. Here is a simplified explanation of the formula effect:
When RPI is calculated, the price rises in the items in a category are calculated using an “arithmetic mean”. Let us consider this example. Assume there are just 2 types of bread, both equally consumed. The price of Bread A has gone up by 2%, but Bread B has gone up by 8%. The arithmetic means of these two is (2+8)/2 = 5%. So 5% would be bread’s contribution to our calculation of the rise in RPI.
This has assumed the demand for the 2 types of bread remains the same; no one has traded down to Bread A, whose price rose less.
However there is a different assumption in the CPI calculation, which (on 70% of items) uses the “geometric mean” instead. It assumes some former Bread B consumers will now buy Bread A instead because of its smaller price rise. The calculation this time, the geometric mean, is the square root of (1.02 times 1.08), which is 1.0496, a 4.96% rise. So 4.96% would be bread’s contribution to our calculation of the rise in CPI. The principle is the same for a more complicated mix (imagine 127 types of bread, not 2). The effect will always be the same though: this part of the calculation will nearly always give us a lower CPI rise than the RPI rise (the CPI and RPI rises would only be the same when all the differerent breads’ price rises were exactly the same). In our simplified example we had CPI’s rise of 4.96%, which is lower than RPI’s 5%. As far as the formula effect is concerned, the CPI rise never being bigger than the RPI rise is a mathematical certainty, due to the difference in the calculations. Most years this will mean that the overall CPI rise is lower than the overall RPI rise. Though other factors can make the CPI rise higher in some years, the overall trend will be for the CPI rise to be lower than the RPI rise.
This difference, between the annual RPI and CPI rise, in USA and most other countries, due to the formula effect is around 0.2%. However, in the UK it is generally between 0.5% and 1.0%. This is because there is a bigger range of price rises in the UK’s categories of goods, so more opportunity to trade down to a lower price rise. A large proportion of this is due to the price range in UK clothes.
The geometric mean calculation implies consumer movement to lower price rise goods, but as far as I can see it is a crude approximation of consumer behaviour.
The meeting agreed that the formula effect, especially the large one that occurs in the UK, was the top priority for further investigation. Why is the UK formula effect much higher than that in other countries? What is the EU latitude on the use of geometric mean as opposed to arithmetic mean in CPI calculation? Would a Pensioner Price Index be better for pensions use than CPI? Further meetings will address these and other pertinent questions and I hope lead to some proposals, if only for a modification in the CPI calculation that would be consistent with the EU required uniformity of definition, but would reduce the formula effect.
5. Variable Pension Option ( VPO): Update ( Dayne Markham)
ABAP is still awaiting news from our lawyers on the VPO complaint lodged with the Pensions Ombudsman. We are again told that the Ombudsman dept is chronically short staffed. ABAP asks again that we remain patient
Meanwhile having traced where the figures for the VPO reside and who owns them ABAP has requested from Chairman of Trustees that the latest figures for the VPO be produced to establish that the Option remains “Cost Neutral” to the scheme. The first letter, also circulated to Pensioner trustees, received a baffled response from chairman of trustees.
The second letter further clarifying our request has now been received at BA pensions, and also circulated to Pensioner Trustees (PMNTs) and will be considered at the next trustee meeting on December 21st.
ABAP sees this information as essential to modifying the long closed VPO as all trustees & beneficiaries involved will finally know the financial state of the Option and a decision can be made accordingly.
6. Widows/ers Pensioner Trustee Election Voting Rights. ( Dayne Markham)
Following the letters written in to BA Pensions by BA widow /ers , ABAP has again written to the Trustees requesting this matter be concluded with an enlightened decision on a low cost but nevertheless important humane issue. We are being assisted by the Pensions Advisory Service following advice from Ros Altmann, the director general of Saga.
Wishing All BA Pensioners a Merry Christmas & Happy 2012
The Committee of ABAP, 11th December 2011