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Which price is right for pensioners: CPI or RPI?
by William Robins on Jul 20, 2010 at 08:00
Pension minister Steve Webb has argued that linking accruals to the consumer price index (CPI) was more appropriate for pensioners who want a stable income, but advisers say the impact will be greater for clients than the government has anticipated.
By linking occupational pensions to the CPI, Webb (pictured) brought private sector defined benefit (DB) schemes in line with public sector and state pensions, which were moved from the retail price index (RPI) link in the emergency Budget.
Last week Webb justified the government’s decision, arguing that the CPI was a more suitable measure of inflation for retired people than the ‘volatile’ RPI.
‘RPI has been volatile in a perverse way for pensioners. RPI-linked increases were frozen when RPI went negative. CPI may give a lower return but wouldn’t have caused increases to freeze,’ he said.
‘CPI matches the profile of pensioners more neatly.’
Distinguishing features
CPI rises are typically 0.5% lower than the RPI due to the latter’s inclusion of house prices and mortgage payments. Since, in the UK, house prices rise faster than other goods and services, Webb argues, the CPI is more representative of a pensioners’ basket of purchases.
Tony Granger, adviser at Shrewsbury-based English Mutual said that although his older clients spend less on typical consumer items he will still use RPI as his main measure of inflation.
‘Clients [affected by the change] could need to make alternative pension saving arrangements to protect themselves against inflation,’ said Granger.
Awareness of inflation key
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5 comments so far. Why not have your say?
Anonymous 1 needed this 'off the record'
Jul 20, 2010 at 12:20
If the argument to change the meaurement of inflation on benefits such as tax credits is that either a) they may not own a house b) maybe in receipt of Housing Benefit.
Surely logic follows that the State Pension should be linked to CPI - presuming that pension should have already finished paying for their house.
Not that I would deny pensioners this change - I think they deserve it.
report thisAnonymous 2 needed this 'off the record'
Jul 20, 2010 at 13:23
It would not be all that hard for the ONS to calculate "pensioner inflation", weighting the basket goods and services in line with what the average pensioner spends (I think this data is in the ONS Household Survey). With modern computer technology this is a small piece of work, and it would benefit pensioners and the state by aligning benefits with the actual cost of living for pensioners.
Is a bit of common sense too much to ask?
report thisMichael Brown
Jul 20, 2010 at 13:33
Agree with Anonymous 2. When do pensioners buy Ipods, etc. They usually have a staple basket which does not include the youger generations gismo's.
The effect I believe would be a higher inflation as the gismo's are usually price driven down which effect the CPI.for the pensioners and rightly so a higher increase in income.
report thisAllan Maxwell
Jul 20, 2010 at 13:35
I think it is reasonable to assume that neither RPI nor CPI accurately reflect the actual inflation experienced by pensioners. RPI allows for house price inflation which is probably not appropriate for the vast majority of pensioners. However does CPI accurately reflect the spending of pensioners? We are always being told that pensioners spend more on energy than the rest of the population. The CPI index will not reflect this.
If the Government are serious about linking pension increase to the correct measure of inflation then a new index is probably required.
Why is it that I get the feeling that this is purely a political decision that has more to do with cutting the level of pension deficits (both public and private) than ensuring pensions are protected against inflation.
report thisCarl Pearson
Jul 22, 2010 at 09:18
The old policy rate - the RPIX rate - which excludes mortgage interest payments and gives greater weight to the categories of expenditure of retired people, is perhaps a more appropriate measure of inflation for pensioners.
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