Personal Pension  

RPI survives to fight another day

Many savers will be breathing a sigh of relief at the recent news the Office for National Statistics has decided to make no changes to the methodology for calculating the retail prices index (apart from a slight change to the way it calculates rental expenditure).

There were fears, following a consultation at the end of last year, that the official statistician, Jil Matheson, would decide to devalue the RPI to bring it closer in line with the consumer price index inflation measure.

The consultation started on the premise that the RPI must over-record inflation because it is normally higher than the CPI. The consultation presented various options which would have resulted in a lower figure for the RPI in future, but the ONS decided it would recommend making no changes to the statistical calculation.

This is most welcome, since many investors have their incomes tied to rises in the official measure of retail prices – any move to force the figure lower would have resulted in lower incomes for millions of people over time.

There must have been significant political pressure on the official statistician to agree the RPI should be lowered. Reducing the RPI would save the exchequer money, because the yields on index-linked gilts and national savings inflation-linked bonds are tied to the RPI, not the CPI.

In addition, many private sector employer pensions are tied to RPI inflation, so those pensioners would have received reduced incomes in future.

Furthermore, the government changed the measure of inflation used for uprating public sector and state pensions from the RPI to the CPI in April 2011, angering many pensioners. Therefore, bringing the official RPI measure of inflation into closer alignment with the CPI would have assuaged some of the concerns about lower pensions. As such, the ONS has publicly demonstrated its independence by deciding to stick with the current methodology for the RPI.

To have radically changed the traditional inflation measure, on which many so people’s incomes depend, could have jeopardised the inflation protection inherent in their income arrangements. It could also have caused problems in the index-linked gilts market, because investors could, in theory, have challenged the decision as a material change to their terms and demanded repayment.

There will, of course, be some downsides to the decision.

For example, some energy, transport and other price rises are linked to RPI, so they may be higher than they would be otherwise. However, it is very important the public has confidence in the official statistics and the inflation figures.

Of course, the reality is there are no truly ‘exact’ statistical measures of inflation – each measure is based on estimates and assumptions which are open to challenge.

That was one of the big problems inherent in the ONS consultation, because it started from the assumption the CPI inflation measure was ‘correct’. Using that logic, the fact the RPI was higher meant it was ‘wrong’.

However, the accuracy of the CPI calculation methods were not actually considered. This is a major reason why my own response called for no change to be made until further consideration had taken place.