View the article online at http://citywire.co.uk/money/article/a649915
Victory for pensioners over inflation changes
The ONS has confirmed the measure of inflation will not be changed, meaning pensioners will not lose out on income.
The government has decided against changing the measure of inflation used for pensions that would have seen pension income and returns from index-linked investments reduced.
The Office of National Statistics (ONS) had consulted on changing the measurement of inflation from the retail price index (RPI) to the slower rising consumer price index (CPI). RPI currently stands at 3.2% and CPI at 2.7%.
However, this was met by an overwhelmingly negative response due to the impact it would have on private sector pensions. Private pension schemes are major investors in government debt and a move to CPI would affect the value of inflation-linked savings certificate and index-linked gilts issued by the government.
Savers investing in NS&I inflation-linked products and index-linked bonds would also have seen their returns fall.
National statistician Jil Matheson said there would be no change at present although a new additional index of inflation will be created. However, the RPI will continue to be used as the measure for private sector pensions and index-linked bonds.
‘There is significant value to users in maintaining the continuity of the existing RPI’s long time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds,’ she said.
Pensions expert Ros Altmann said the decision showed the independence of the ONS office and was a positive outcome for savers.
‘These indices are vital to many people’s future incomes and, if they are being used as a way of providing protection against inflation, they need to reflect as well as possible the actual price rises that people will face in future,’ she said.
‘If the inflation measure being used actually under-records inflation, then those whose incomes are meant to be protected will become poorer over time and be able to afford to buy less and less each year.’
Although there are plans for the introduction of a new inflation measure, known as RPIJ, that will run alongside RPI, Hargreaves Lansdown is also calling for the use of a pensioners’ inflation index.
Pensioners are disproportionately affected by inflation as they spend a larger proportion of their money on essential items that have seen the fastest price increases.
Tom McPhail, head of pensions research at Hargreaves Lansdown, said the decision to use RPI ‘will be welcome news for all those dependent on pension
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