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| Inflation: Changes to the calculation of RPI expected | Inflation: Changes to the calculation of RPI expected |
| (about 9 hours later) | |
| Changes to the measurement of inflation are set to be announced on Thursday, potentially cutting the income of many private sector pensioners. | |
| The Office for National Statistics has been consulting since October on three possible changes to the way the retail prices index (RPI) is calculated. | The Office for National Statistics has been consulting since October on three possible changes to the way the retail prices index (RPI) is calculated. |
| Any of the changes would ensure that RPI rose more slowly in the future. | Any of the changes would ensure that RPI rose more slowly in the future. |
| That would also restrain the future income of people holding index-linked bonds and savings certificates. | That would also restrain the future income of people holding index-linked bonds and savings certificates. |
| "The RPI change could be very significant," warned Joanne Livingstone of actuaries Punter Southall. | "The RPI change could be very significant," warned Joanne Livingstone of actuaries Punter Southall. |
| Widening gap | Widening gap |
| The ONS has been concerned at the widening gap in the past three years between the long-standing RPI and the government's preferred alternative, the slower rising consumer prices index (CPI). | The ONS has been concerned at the widening gap in the past three years between the long-standing RPI and the government's preferred alternative, the slower rising consumer prices index (CPI). |
| Part of the gap has been due to the fact that they measure different baskets of goods and services. | Part of the gap has been due to the fact that they measure different baskets of goods and services. |
| But the main factor is that the two measures use different arithmetical methods for calculating average prices. | But the main factor is that the two measures use different arithmetical methods for calculating average prices. |
| This has meant that since CPI was first used in the UK in 1996, it has lagged behind RPI by an average of 1.2 percentage points each year, with the "formula effect", as it is known, being responsible for about half of that. | This has meant that since CPI was first used in the UK in 1996, it has lagged behind RPI by an average of 1.2 percentage points each year, with the "formula effect", as it is known, being responsible for about half of that. |
| Since the start of 2010, however, when the ONS altered the way in which it accounted for changes to the price of clothes, the formula effect has become stronger. It now contributes 0.9 percentage points of that 1.2 percentage point difference between RPI and CPI. | Since the start of 2010, however, when the ONS altered the way in which it accounted for changes to the price of clothes, the formula effect has become stronger. It now contributes 0.9 percentage points of that 1.2 percentage point difference between RPI and CPI. |
| The Office for Budget Responsibility (OBR) has forecast that the overall gap will widen even further in the rest of this decade, to an average of 1.4 percentage points each year. | The Office for Budget Responsibility (OBR) has forecast that the overall gap will widen even further in the rest of this decade, to an average of 1.4 percentage points each year. |
| 'Innocuous appearance' | 'Innocuous appearance' |
| The ONS has been consulting on either doing nothing, or making one of three possible changes, any of which would, to a greater or lesser extent, rein in the formula effect. | The ONS has been consulting on either doing nothing, or making one of three possible changes, any of which would, to a greater or lesser extent, rein in the formula effect. |
| Removing it completely, which is one option, would shrink the overall gap between RPI and CPI considerably, although the two measures would still continue to be different. | Removing it completely, which is one option, would shrink the overall gap between RPI and CPI considerably, although the two measures would still continue to be different. |
| The National Association of Pension Funds has argued against any change because so many pensioners in the private sector have their annual increases linked to RPI, and would suffer if it was designed to rise more slowly in the future. | The National Association of Pension Funds has argued against any change because so many pensioners in the private sector have their annual increases linked to RPI, and would suffer if it was designed to rise more slowly in the future. |
| Ros Altmann, director general of Saga, said the ONS should concentrate its efforts on devising a bespoke inflation index for pensioners. | Ros Altmann, director general of Saga, said the ONS should concentrate its efforts on devising a bespoke inflation index for pensioners. |
| "After 30 years of retirement, someone who receives 0.6% lower inflation uprating will end up with a pension nearly 20% lower," she 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." | "Therefore, over time, pensioners will be able to afford less and less and pensioner poverty will increase once again." |
| Others who might suffer are pensioners who have used their private pension pots to buy an index-linked pension, or annuity. | Others who might suffer are pensioners who have used their private pension pots to buy an index-linked pension, or annuity. |
| Tom McPhail, of Hargreaves Lansdown, gave the example of a 65-year old with a £100,000 pension pot who takes an RPI-linked annuity, currently paying £3,663 a year. | Tom McPhail, of Hargreaves Lansdown, gave the example of a 65-year old with a £100,000 pension pot who takes an RPI-linked annuity, currently paying £3,663 a year. |
| He said that after 20 years, such a person would have lost more than £9,500 if the formula effect were abolished altogether. | He said that after 20 years, such a person would have lost more than £9,500 if the formula effect were abolished altogether. |
| "This kind of change can prove to be the most damaging of stealth attacks on pensioner incomes; it appears innocuous, but over an entire retirement, it can slowly deprive pensioners of thousands of pounds," said Mr McPhail. | "This kind of change can prove to be the most damaging of stealth attacks on pensioner incomes; it appears innocuous, but over an entire retirement, it can slowly deprive pensioners of thousands of pounds," said Mr McPhail. |
| Insurance firms, who hold many of the £350bn of index-linked bonds, or gilts, in issue have also argued against any change, as it would reduce their future income from these investments. | Insurance firms, who hold many of the £350bn of index-linked bonds, or gilts, in issue have also argued against any change, as it would reduce their future income from these investments. |
| Any change to gilt returns would have to be agreed by the Chancellor, George Osborne, if the governor of the Bank of England, Sir Mervyn King, felt the change was detrimental to bond holders. | Any change to gilt returns would have to be agreed by the Chancellor, George Osborne, if the governor of the Bank of England, Sir Mervyn King, felt the change was detrimental to bond holders. |
| Who would benefit? | Who would benefit? |
| The government would save between £1bn and £2bn a year in gilt interest payments, Punter Southall has suggested. | The government would save between £1bn and £2bn a year in gilt interest payments, Punter Southall has suggested. |
| Pension schemes themselves would need to hold fewer assets if they believed that the pensions they had to pay would rise more slowly. | Pension schemes themselves would need to hold fewer assets if they believed that the pensions they had to pay would rise more slowly. |
| This would cut some scheme deficits at a stroke. | This would cut some scheme deficits at a stroke. |
| Rail travellers would see smaller increases in those regulated rail fares which are partly linked to inflation. | Rail travellers would see smaller increases in those regulated rail fares which are partly linked to inflation. |
| And current and former students, whose interest payments on their student loan debts are linked to the RPI, would also repay less. | And current and former students, whose interest payments on their student loan debts are linked to the RPI, would also repay less. |
| In England, at the end of the 2011-12 financial year, they had collectively racked up student loan debts of £40bn. | In England, at the end of the 2011-12 financial year, they had collectively racked up student loan debts of £40bn. |