Proposed inflation shake-up ‘kicked down the road’ to 2030

PA

Proposals for an inflation shake-up will not be put in place before 2030.

Chancellor Rishi Sunak said that while he understood the arguments of the UK Statistics Authority’s (UKSA) proposals, he was unable to offer his consent before 2030.

It means the proposed shake-up, which could affect pension holders among others, can legally and practically be made by the UKSA in February 2030.

A consultation was previously held into reforming the retail prices index (RPI) measure of inflation, which is linked to products such as investments and pensions.

Concerns had been raised that that way RPI is calculated means it is likely to overstate inflation.

The more favoured method for calculating inflation is the consumer prices index including owner-occupiers’ housing costs (CPIH). It was designated a national statistic in July 2017.

Views were sought about whether proposed RPI reforms should be implemented at a date other than 2030 and, if so, when between 2025 and 2030.

Concerns have been raised that some investors and pension holders would lose out due to the changes, while rail commuters could gain as many train fares are linked to the higher RPI measure.

In August, the Association of British Insurers (ABI) said implementing the plans by 2025 could leave those affected worse off by up to £122 billion by reducing the value of gilts tied to inflation.

Chancellor Rishi Sunak wrote a letter to Sir David Norgrove, chairman of the UKSA, which was published on the gov.uk website.

Mr Sunak said: “Having considered the responses submitted to the consultation, I am informing you and the board that while, like my predecessor, I see the statistical arguments of the board’s intended approach to reform RPI, in order to minimise the impact of UKSA’s reform to RPI on the holders of index-linked gilts, I will be unable to offer my consent to the implementation of such a proposal before the maturity of the final specific index-linked gilt in 2030.

“After this specific index-linked gilt has matured, the UKSA board can implement changes to RPI unilaterally.”

David Gibb, a financial planner at Quilter, said some people will “breathe a sigh of relief” that changes have been blocked until 2030.

He said: “In particular the owners of Government-issued index-linked gilts, who are predominantly pension schemes, will be able to hold their current gilts to maturity without fear of revaluation.

“Similarly many defined benefit pension schemes pay an income that is linked to RPI. As pension schemes are, by definition, a long-term product, just a small tweak in the methodology for increasing payments can have a huge impact on the value of the pension.

“For now this has been kicked down the road and that should help give people time to plan appropriately.”

Hargreaves Lansdown said nearly two-thirds of private sector defined benefit schemes link rises in pension income directly to RPI, so switching to a lower measure could mean lower incomes in retirement.

Holders of pensions annuities with index-linked RPI guarantees also risk seeing their retirement incomes rise more slowly after 2030, it said.

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