New inflation blow set to hit pensioners

squeezeAP Photo/Luca Bruno

The way that inflation is calculated is under review, and changes being considered by the Office for National Statistics could be a terrible blow for pensioners.

So what is the worry, and why change at all?


The change

The Office for National Statistics is consulting on whether or not to make changes, based on the fact that the RPI and CPI are both supposed to be measures of inflation, but differ wildly.

The experts are concerned not at the fact that they differ (because they measure different things) but that even when they are measuring the change in price of the same thing, they somehow come up with different figures.

The consultation

The consultation makes for pretty dry reading, but lurking within it is a serious concern.

It's asking for views on four different options. The first is to leave things exactly as they are. The second changes the way that the RPI averages out how the price of clothes changes over time. At the moment this is one of the biggest areas of divergence between RPI and CPI calculation. The third would apply this change to the formula across all price averaging.

And the fourth would change the RPI so that its formulae align fully with those used in the CPI. The numbers themselves would still differ, because they measure slightly different things - including the fact that the RPI includes the cost of buying and owning a home. However, the differences would all be deliberate - and not a quirk of the maths.

Problem for RPI

The end result of all but the first option would be to make RPI slightly closer to CPI - which would generally tend to make it lower - and this is what is worrying pensioners and some savers.

Some pensioners have already suffered the indignity of having their inflation link changed from RPI to the much lower CPI. The government allowed this back in 2011, and public sector pensions and many private sector pensions have already made the move.

However, three in four private sector pensions have not changed - because the link to RPI is enshrined in their rules.

If the way the RPI is calculated changes, then those last remaining private pensions that are still linked to RPI would suddenly find themselves linked to something that rose much more slowly. Likewise savers with inflation linked savings certificates and index linked bonds, would see their returns fall overnight.

It means that across the board, suddenly the vast majority of retired people would find themselves worse off in every subsequent year after retirement.... and that's a worry for all of us.

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