MPs and peers have urged the government to correct a flaw in the retail price index (RPI), but this could leave pensioners worse off, experts have warned.
The House of Commons’ Treasury committee and the House of Lords’ Economic Affairs committee asked for a correction of the inflation measure, which is still being used to uprate pension benefits by some defined benefit (DB) schemes.
They said a statistical error with RPI on clothing had caused it to artificially increase by 0.3 percentage points in 2010, leading to a £1bn yearly windfall for index-linked gilt holders, which also used this inflation measure.
The chairs of both committees have called on the UK Statistics Authority (UKSA) to write to the chancellor for permission to correct the error.
But making the correction could also have an impact on pensions going forward.
Sir Steve Webb, former pensions minister and director of policy at Royal London, explained the change would reduce annual increases on pension benefits of DB scheme members and RPI-linked annuities that pensioners hold.
Ian Neale, director at pensions specialist Aries Insight, agreed.
He said: "Even if past overpayments were ignored, and the clothing price change reversed, future interest payments on index-linked gilts, which are uprated in line with RPI, would be expected to be lower: hardly what the Chancellor of the Exchequer - or pension schemes - would want."
In 2010 the government dropped RPI as an official inflation measure, switching to the consumer price index (CPI).
RPI generally runs at about 1 percentage point higher than CPI. RPI is currently 2.5 per cent, whereas CPI is 1.8 per cent.
Pension schemes can link increases to their employees' pensions - and therefore the employers' liabilities - to CPI, as long as their own rules don’t specifically mention RPI.
This has been a matter discussed in several court cases, such as BT or Barnardo’s, with trustees and employers seeking approval to change their inflation indexation, which would reduce the benefit payments to members.
Mr Neale, who called the RPI error a "huge embarrassment" for the statistical profession in the UK, said it was unlikely the government would budge.
He said: "Even if the UKSA does succumb to pressure such as this joint letter from the two committees, I expect the government will continue to ignore it – because of the cost of correction.
"It is not credible that money would be recouped from overpaid index-linked gilt holders or pensioners."
But he added: "If the Bank of England deemed the clothing change to be 'fundamental' and 'materially detrimental' to index–linked gilt holders, the chancellor would have to approve the change."
Similarly, Sir Steve said: "My assumption would be that if schemes used the RPI as reported at the time by the Office for National Statistics, in line with their scheme rules, it would be pretty outrageous if government said that it now thought they were paid too much and had to pay it back."
maria.espadinha@ft.com
