RPI review 'may hit pensioners'

Changes to the way a key measure of inflation is calculated could be announced on Thursday amid fears of a "stealth attack" on pensioners.

The Office for National Statistics (ONS) will announce the results of a review of the Retail Prices Index (RPI) as it looks at ways to reduce the gap with the official Consumer Prices Index (CPI) measure of inflation.

Any move to change RPI calculations would have far-reaching implications, with RPI linked to a wide variety of services and investments, from water bills and rail fares to pensions and even national debt. There are growing concerns in particular for pensioners as many annuities are linked to RPI and even a small percentage change could knock thousands of pounds off a typical 20-year retirement income.

The proposals are also attracting controversy as they could provide a boost to Chancellor George Osborne and his debt-busting plans, saving the Treasury billions of pounds a year in interest on government bonds. Plans under review could see changes to the way prices are calculated for goods, which is different for CPI and RPI, leading to the so-called "formula effect gap".

Traditionally RPI has been higher because it includes mortgage interest payments, but as borrowing rates have been slashed in recent years, the formula effect is now the biggest factor behind the gap, accounting for a 0.9 percentage point difference between CPI and RPI on average.

Tom McPhail, head of pensions research at Hargreaves Lansdown, said if RPI was reduced by 0.9% it would slash retirement income by more than £9,500 over 20 years on a market-leading index-linked annuity.

"This kind of change can prove to be the most damaging of stealth attacks on pensioner incomes," he said. "It appears innocuous, but over an entire retirement it can slowly deprive pensioners of thousands of pounds."

Changes that would lower the rate of RPI would also reduce the returns on index-linked gilts and bonds. This would be good news for the Treasury by bringing down the cost of servicing its debt by an estimated £3 billion to £4 billion, JP Morgan economist Allan Monks said.

"After 30 years of retirement, someone who receives 0.6% lower inflation uprating will end up with a pension nearly 20% lower," she said.

"Therefore, over time, pensioners will be able to afford less and less and pensioner poverty will increase once again."

[...] Even the Retail Price Index (RPI), generally thought a more realistic indicator, only records an increase of 38%. With the costs of essentials such as electricity, gas and food increasing so quickly, the lower a person’s income, the less realistic the government numbers are. Saga estimates that for the over-65 age group, the real level of inflation over the past 4 years alone has been 20%. [...]

RPI is generally higher than CPI and, although the gap is currently only 0.4%, it has been as much as 2%. Much as we might scoff at statistics, these official inflation numbers have a massive influence on the lives of millions [...]

The amount of money the government can generate by linking revenue to RPI palls in comparison with how much it can save by linking its expenditure to the lower CPI measure. Since coming to office the Chancellor has slashed tens of billions of pounds from future government spending simply by changing the indexation of public sector pensions and welfare benefits from RPI to CPI. Nothing in the real world has changed; prices will rise just as much, but the result will be lower pensions and benefits [...]

The independent UK Statistics Authority is currently asking the Office for National Statistics to carry out a consultation called “Options for improving the RPI”. You might hope that the aim would be to find a way to bring RPI more in line with our everyday experience. On the contrary, it aims to find a way to narrow gap between the two. In other words, it seeks to make RPI produce a consistently lower number.

The most obvious result of this will be a reduction in increases for NS&I index-linked bonds and private pensions [...]

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