APS and the change from RPI to CPI
Does changing from RPI to CPI really make that much of a difference?
Yes, although the percentage difference between RPI and CPI may be small, it will happen every year. Each time you lose a bit off your pension it is lost for ever. By the time of the next general election, pensions rising by RPI could easily be 10% higher than those going up by CPI. In twenty years it will be 20%. To illustrate the point, if this years difference between RPI and CPI (1.5%) was replicated every year for the next 20 years, then the value of an APS pension for someone currently receiving £10,000 p.a. would only rise to £18,415p.a with CPI, compared to £24,583 p.a. with RPI. That’s 25% less, and amounts to a cash difference of £6,168 a year - a significant amount of money for a pensioner trying to make ends meet.
Is CPI fair?
No. As far as up-rating pensions is concerned, CPI is a swindle. The pensions rule for annual pension increases is there so the spending power of your pension does not get eaten away by inflation. CPI does not do that because it assumes that, as prices rise, you buy cheaper things. Over time you will not be able to afford the same as you did when you first started drawing your pension. That is not how it was throughout your working life, it is not what you and BA contributed towards - a swindle.
Who is to blame?
The Government came up with the idea but they now say they do not intend to force any private company trustees to switch to CPI; it is just available to them if they want to. Contrary to Government spin, the Bank of England has expressed no view and made no recommendation on the appropriate price index for the purposes of uprating pensions. The Government has a big problem with unfunded public sector pensions that have to be paid out of today’s taxes but private sector pensions should have enough investments to pay future pensions. Switching to CPI may be a least bad option if the alternative is to risk the pension fund running out of money. That does not apply to APS, regardless of what you might hear.
Did the trustees have to adopt CPI?
We do not know all the legal advice the trustees have had but we believe they must have been told that CPI was one option open to them. That is far removed from saying they had to use CPI. We believe they should have made sure they all understood the validity of CPI before adopting it, and we do not think they did that. The Government has been saying that the Bank of England recommends CPI rather than RPI. We know from our own discussions with the Bank of England that the bank has made no such comment on the appropriate index to use for annual increases of pensions. That is not particularly surprising for two reasons: first, because of the way CPI is calculated and the fact that, by design, it does not keep pace with prices; and second, because the Bank of England uses RPI for the pensions of its own employees. This information would have been available to the trustees if they had looked for it.
How secure is APS?
It is very secure. On 30 June 2010, eight days after the Chancellor made his announcement about CPI, BA, the actuary and the trustees all agreed that the company must pay £55m each year until 2023 to fund existing pension entitlements. Furthermore, in years when BA does particularly well, some of their excess cash must be given to APS and some to NAPS. Until BA has paid all its debt APS has two lots of guarantees totalling £480m. Unlike many other schemes, APS has very conservative investments. Even if BA went bust tomorrow there would be plenty of money available in APS.
Is BA still paying this money?
Yes, they have said they will stick to the current funding plan. However, at the next valuation, if the trustees are still determined to keep pension increases at CPI, the calculation will show that the debt owed by BA has considerably reduced; it may even have gone completely. It is reasonable to assume that BA will argue they should stop paying any more to APS and the fund will be worse off by as much as £400m. This could be the difference between being able to afford RPI and not.
Do we think the trustees have acted fairly over this?
It was certainly a surprise that half of the elected APS trustees resigned. Had it been only one you might have questioned whether he or she was realistic in what they were trying achieve, but 3 resignations suggests serious problems in the way the board is operating. Before the resignations the board had 6 elected trustees, all with long trustee or professional pensions experience; 5 senior managers nominated by BA (3 of whom had only just been appointed); and a very experienced external chairman who is also chairman of at least one other FTSE 100 pension scheme. The chairman is appointed by BA and has a BA contract and benefits package. The chairman and the 5 employer nominated trustees are also trustees of NAPS and all, except the chairman, are members of NAPS. This is the first board where none of BA’s nominated trustees is a member of APS. Inevitably all trustees have to work with conflicts of interest of one kind or another, whether it is as a personal beneficiary of the pension fund, as a senior manager of the employer or when the interests of the two pension schemes are not aligned. It is possible that the conflicts are not fully appreciated and yet too profound for even the clearest mind to set aside when making important decisions.
What can we do about it?
The hope is that sense will prevail and the trustees will accept that the strength of feeling expressed at he members’ meeting in Ascot on 11 July means they must reconsider this. They should consider all the options and not just get an opinion that supports their first decision. Second, whatever the final outcome of their deliberations, the trustees should ask a court to consider their decision. This is not unusual for trustees who need to take a controversial decision or one where a significant number of trustees have a conflict of interest. The retrospective loss of benefit for APS pensioners is too large for this issue to be decided behind the closed doors of the trustee board room. Taking it to court will allow all sides of the argument to be heard making it much easier for people to accept the outcome, whatever that is.
“Victory is always possible for the person who refuses to stop fighting” - Napoleon Hill