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Steve Webb plays pensions conjurer as spoptlight was on Gove

The Lib Dem pensions minister announced gifts to funds, something lost among the focus on Michael Gove's apology

Liberal Democrat MP Steve Webb
Pensions minister Steve Webb. Photograph: PA

Are we all directing our outrage the wrong way this morning as we contemplate the shambles of Michael Gove's schools building programme and the tattered independence and competence of George Osborne's much-vaunted Office of Budget Responsibility?

I think we may be. Today's real coalition sleight of hand, one which will affect the income of millions for decades to come, is calculated, not a cock-up. It is tucked away on the financial pages – or not reported at all – and the minister in the frame is not a macho man like Gove or Osborne, but mild-mannered Lib Dem leftie Steve Webb, the pensions minister.

We're talking proper money here, a one-off gift to pension funds – at the expense of their customers – worth an estimated £50 - £100bn. I'll come back to it in a moment.

What we did learn on the front pages this morning, that the OBR has been further compromised by some unemployment predictions that were helpfully tweaked to make them 175,000 fewer than originally calculated after the impending spending cuts have kicked in.

Does it help a government struggling to establish, let alone sustain, some credibility with voters, assorted elites and the markets? No, it doesn't. Does it matter much over the long haul? No, probably not, provided they don't repeat this Keystone Cops routine every week.

Why not ? Because all governments screw up. You screw up, I screw up. So do the people next door on both sides. Even the tabloids get things wrong occasionally. What keeps you awake at night, someone asked that most unflappable PM, Harold Macmillan? " Events, dear boy, events," he is supposed to have replied.

It's unsurprising now for two reasons.

No 1: The coalition is in a hurry, it knows it has only a finite stock of goodwill from a public which is nervous and impatient about what the future holds. It should act quickly both to get unpopular decisions out of the way and to make a positive impact with assorted constituencies.

So Teresa May abandons Labour's random stop-and-search policy – section 44 - which will be popular until something goes wrong. Gove announces his expanded academies programme – which is meant to be popular with parents – and then his building cuts – which won't be popular with anyone.

Not least among the irritated will be hard-pressed construction companies which rely on the public sector during private sector downturns. Myself, I don't see classrooms as public relief for Costains or McAlpines and their employees. Gove may be right to say trimming the programme won't affect standards much, the bit that matters most.

Unfortunately, as everyone now knows, they got the lists wrong, not once but twice. The schools secretary is still apologising.

That leads to point No 2: It's not surprising that they did because the same civil servants who made mistakes for which Labour ministers had to apologise are now making them on behalf of the coalition. They are the permanent government and they never get the sack.

At least Gove was gracefully comprehensive in taking the blame – the thing elected ministers are supposed to do - it's not something Gordon Brown was much inclined to do. The ex-PM is an instinctive blamer.

It is a vice which opposition accentuates in politicians who forget their goal is to be in government one day, where similar things can happen to them. I can already hear Ed Balls complaining that Gove "didn't fix the roof while the sun was shining" – or not shining, as is likely to be the economic case for a while.

The failure to get the OBR up and running properly also reflects political haste and a lack of civil service foresight – and may do more lasting damage.

They should surely have realised that locating it inside the Treasury – close to the chancellor's own office – would be asking for trouble. Getting Sir Alan Budd, the temp chairman, to release his jobless calculations 24 hours early – to neutralise Larry Eliott's gloomier Guardian leak – wasn't smart either. Budd (72) is now re-retiring back to Devon, possibly hurt, leaving no replacement. Egg on faces.

On top of which the media seems to have established that the stats were tweaked anyway, from a potential 775,000 lost as a result of the coming cuts in the public sector by 2015-16, not the 600,000 published.

In fairness, these calculations are as much an art as a science – depending on such elusive concepts as the output gap (how much spare capacity is there in the economy?) and the sustainable long-term growth trend ( has it been permanently damaged?), etc.

It's not a crime or even an error, more a matter of judgement and fine tuning, albeit politically convenient for the chap down the corridor. That's why on any given day, the European Central Bank can be upbeat about recovery (today), the OECD can be gloomy (yesterday) and the IMF can warn Osborne (today again) that his 2010 cuts risk renewed recession.

As the PM showed in his own speech to civil servants yesterday, David Cameron and his ministers are putting a great deal of faith – wholesome but probably naïve – in liberating the energies of the "big society" by getting officialdom off its back. When they talk like this they sound like Tory Trots working from a blueprint and a hunch.

Never mind, it is early days and, as ministers like to point out, Labour would have done a lot of cutting too, though not as much or as fast as even Vince Cable was persuaded to do after talking to officials – including the bank of England's Mervyn King – after the Greek debt crisis.

The real statistical sleight of hand performed wasn't about schools or jobless projections. It was the coalition's decision – announced by Webb – to allow private sector occupational pension funds to upgrade defined pensions by the Consumer Price Index (CPI) each year rather than the traditional Retail Price Index (RPI).

Why does it matter? Because the CPI does not include mortgage costs which reflect house prices and therefore tends to be 0.7% lower every year, though currently it's 3.4% against over 5%. Such modest differences add up – very quickly it's 20% off the value of your pension.

Today's Daily Mail – usually more alarmist than the FT – says a £27,000 RPI pension in 2030 will become a £19,500 CPI pension. As usual, the Mail exaggerates the salaries and likely pensions of its readers. And, as Webb points out, they did the same job on state pensions and benefits in the budget, moving upgrades from RPI to CPI, thereby saving £13 bn over five years. It is a "more appropriate" measure, he said. Most pensioners have paid off the house.

It's the latest tweak in many as we grapple with the implications of longevity and rash promises made to employees that could never be honoured. State pension rises were capped at 5% in 1997, at 2.5% in 2005. The state pension age is being raised. State occupational pensions are being trimmed.

Don't think it affects only Old Fartonians like me. It will affect young readers far more. When I last asked John Ralfe, the very independent pensions analyst what he made of it all he said that occupational pensions in the private sector were always a bit of a racket – underfunded and chiefly there to benefit higher management which likes to award itself better deals.

It started to go wrong when the stock market, where so much pension money is invested, went wobbly in 2000 and the new transparency requirements for accountancy – FRS17 – shone unwelcome light on pension liabilities. Firms started closing down schemes to new entrants or shifting from defined benefits based on final salary to cash purchase schemes where the risk is borne by the pensioner. Gordon Brown's famous pension raid didn't help but was small spuds.

Someone said to me the other day: "It is almost certain that the first human being to live to be 150 is already alive," so I suspect Steve Webb – a clever, thoughtful man – is probably right. But I'd still like to see coalition ministers spell it out more clearly.


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  • fortyniner fortyniner

    9 Jul 2010, 12:53PM

    It's simple maths. We're all living longer so pension funds are going to be able to pay out less per head.

    That is why we're seeing the pension age raised and pension contributions almost certainly increased. But then people will not be forced to retire at a given age either.

    It will probably mean that people will wind down rather than suddenly retire on their 65th birthday, or whenever the official retirement age falls in future.

    Personally, I welcome that move. I started to work part time when I was 60 last year and will probably go working in some capacity as long as I'm able or it pleases me.

    Living longer has its price, like everything else - unfortunately.

  • Gordi Gordi

    9 Jul 2010, 1:34PM

    Another thing done from this coalition government that spell out misery not only for the next few years to come but in the long run as well. I am loosing the will to live. What can one do except just watch with such frustration that is difficult to explain?

    Fortyniner thinks that is very easy to find a job when you are over 50 as is my case. Unfortunately the reality for the majority is very different and for all the words that this new government say the care etc, the truth is that they are relishing the power they now have and they are ruthless.

  • Cuse Cuse

    9 Jul 2010, 1:45PM

    Michael - whether exaggerated or not - your blog makes the point perfectly well.

    Your dear old employer is supporting the re-Thatcherisation of British politics under Cameron and Cleggeron as if the '80s never happened. This pension wheeze is the latest in a long line of Coalition policies made up on the hoof and designed specifically to attack the least well off.

    This Coalition is dangerous because of the Liberals - not in spite of them.

    The sooner the Guardian realises this it may see rising circulation figures again.

  • Bobbyb71 Bobbyb71

    9 Jul 2010, 2:34PM

    Who's Steve Webb ?
    Is he a Orange book neo-con. I literally don't know ?

    Some lib-dems have gone missing completely. Sarah Teather for one.
    Couldn't keep her off the tele before the election.

    Is she locked in Gove's study ?

  • battersea1 battersea1

    9 Jul 2010, 3:46PM

    Yesterday I received my retirement pack from my future Private Pension of which I have paid into for 40 years and I have watched it decrease rapidly ,now it will not pay me a comfortable income and will further decrease due to them changing it to CPI

    How can this benefit anyone as pensioners either now or in the future will be worse off as the cost of living increases

    It is a disgrace

  • fortyniner fortyniner

    9 Jul 2010, 4:27PM

    @Gordi
    I'm afraid you ignore demographics. If Labour had won the election I suspect they would have been forced to act in a similar way. Add up the baby-boomers and the fact that we're all living longer. Where's the cash coming from to keep us?

    Don't shoot the messenger - in this case the coalition. At least they are facing the situation and taking some form of action. Where is the money coming from to fund pensions? Higher pension contributions and later retirement are inevitable I'm afraid, especially for the younger generation. Tell me another realistic solution but I think you'll be struggling.

    And I never said it was easy to get a job at my age. I was made redundant from a long-term permanent job three years ago and have had to make do with temporary contracts until recently in between periods out of work. Here in the north east you can't be choosy and you have to pester the job agencies. Depends up to a point on attitude and how much you want or need to work.

    In this country we have lived in denial for too long, and our leaders have sold us quick fixes rather than long term solutions. We've been living on borrowed money and borrowed time and our chickens have well and truly come home to roost.

  • GlennOlive GlennOlive

    9 Jul 2010, 5:49PM

    Dear Cuse,

    The fact that you (at the age of 38 and living in Hampshire) have "too many memories of the Thatcher Years to ever forget" doesn't mean that everything you see is automatically to be judged as a reprise of those Thatcher Years.

    The primary reason why New Labour didn't want to be re-elected was because they didn't want to be seen to make the hard decisions necessary to clean up their own gigantic economic mess - budget deficit, pensions, unsupported spending pledges, over-clocked currency, etc., etc., etc.

    If New Labour had had the courage and the sense of responsibility to address the consequences of their own failings, they too would be making exactly these sort of decisions now, because the realities of our national economic situation require that such decisions be made.

  • AmberStar AmberStar

    9 Jul 2010, 5:53PM

    @ Michael White

    The excellent John Ralfe has just rung to warn me against exaggerating the impact of the CPI/RPI change on pensioners, current and future ones - as he suspects that overnight reports may have done so.

    He needs to get on the phone to several of our largest accountancy firms then - because they are forecasting massive savings for the employers.

    If the effect on pensions is small, it's hard to see how the employers will save £Bns? And if the impact is minor, why bother making this change? Did GO & Webb fail to realise that there's a 5% cap in place already?

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