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UK roundup: Steve Webb, CPI/RPI, Centre for Policy Studies, annuities

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  • UK roundup: Steve Webb, CPI/RPI, Centre for Policy Studies, annuities

UK - The UK's pensions minister has rejected claims that the government's shift in the way pensions are uprated was just about saving the state money, saying it was aimed at finding a measure that better reflected the experience of pensioners.

Speaking in a parliamentary debate yesterday triggered by an online petition on the switch to the consumer prices index (CPI), Steve Webb said: "Clearly, the fiscal context was important to the decision - no one is pretending it was not - but the most appropriate index, CPI, was chosen by the government, which is the one we went ahead with."

The Labour MP John McDonnell had tabled a motion calling on the government to reintroduce the retail prices index (RPI) measure for the indexation of occupational pensions.

He said the government's decision to change indexation from the RPI to the CPI would cause many people to get less in pension payments than they had been led to expect.

The motion had been prompted by the online petition on the change which had attracted more than 100,000 signatures. In the end, the motion was defeated by 232 votes to 33.

Webb said he had chosen a measure of inflation, "that is internationally standardised and used by the Bank of England for macro-economic targeting, and that better reflects the spending patterns of pensioners".

He highlighted the key difference between the two measures, noting that CPI excluded the cost of mortgage interest from its 'basket of goods' used to calculate increases. "It is worth pointing out that only 8% of pensioners have a mortgage," he said.

Webb also cited the Institute for Fiscal Studies saying that CPI better captured the way in which people on lower incomes respond to price changes. The index assumes that when prices for certain products rise, people tend to buy cheaper alternatives.

Though some MPs in the debate had suggested that pensioners were not generally able to shop around, Webb disagreed.

"I think that most pensioners are pretty canny," he said. "They are the most likely to shop around, and that is the way in which the CPI is constructed."

However, McDonnell rejected Webb's point about the real motivation for the change. He said judges in the High Court had made their view clear, that the move was really the result of the government's desire to force through budget cuts.

"The government's motivation is to do with deficit reduction and cuts, not which inflation measure should be adopted," he said. "The government are placing the burden of the cuts on pensioners. Pensioners will never forgive them for that."

One of the groups to bring the court case against the government recently predicted it would continue to challenge any unfavourable rulings until the case reached the Supreme Court. http://www.ipe.com/news/treasury-to-take-cpi-case-to-supreme-court-pensions-group-predicts_44149.php

In other news, the Centre for Policy Studies has said the problem of defined contribution (DC) scheme members ending up with a poor annuity product could be solved by setting up an "annuity clearing house" - following comments from the National Association of Pension Funds that the market was "toxic".

As part of this, the research suggested the Open Market Option (OMO) - which allows retirees shop around for the best annuity rate - could be made mandatory.

In a briefing note, Michael Johnson, research fellow of the right-of-centre think tank, said: "One third of over-55s have 'never heard' of the OMO, a problem compounded by 70% not fully understanding what an annuity is."

"The most simple solution would be to make the exercise of the OMO mandatory," he said.

"This could be achieved via a new annuities clearing house; essentially, a marketplace in which all annuity providers participate."

According to Johnson's suggestions, a standard form could be submitted to the clearing house shortly before retirement detailing any ill-health issues and the types of annuity required.

"As many people will not know which type of annuity is appropriate for them, an information pack should include details of how to obtain independent advice," he said.

"Providers could then bid, daily, for the annuity business, with unsold annuities being retendered the following day," he said.

Johnson said this process should introduce pricing tension and transparency - with all transaction prices being published at the end of the day.

Offering the OMO has been a legal requirement since 1975, for both DC occupational pension schemes and personal pensions.

But figures from the Association of British Insurers (ABI) show that there are still around a third of retirees who simply take the annuity offered, potentially losing thousand of pounds over the course of their retirement.

In a bid to counter consumer inertia, the ABI is introducing a compulsory code of conduct for members to stop them including an annuity application form in the communications they send to pension customers.

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