Relief for pensioners as changes ruled out for inflation measure

 

Pensioners were given some welcome news today after the UK's top statistician said a key measure of inflation linked to retirement income and a raft of other investments and services should remain unchanged.

Jil Matheson, the national statistician, said that while the calculations used behind the RPI (Retail Prices Index) do not meet international standards, the index should be maintained due to its "significant value" to index-linked bond markets.

She recommended that a new index should be created from March, called RPIJ, which would use a different way of calculating the prices of goods and be closer aligned to the UK's benchmark level of inflation, the CPI (Consumer Prices Index).

There had been fears that changes to RPI calculations would see the index rise at a slower pace, which would have far-reaching implications as the index is linked to a wide variety of services and investments, from water bills and rail fares to pensions and even national debt.

There were concerns in particular for pensioners, as many annuities are linked to RPI and even a small percentage change could knock thousands of pounds off a typical 20-year retirement income.

Many private pensioners also have their annual increases linked to RPI, while returns for investors with index-linked bonds and savings certificates are likewise based on the index.

The RPI review had also attracted controversy, as any change prompting a fall in the index would have provided a boost to Chancellor George Osborne and his debt-busting plans, saving the Treasury billions of pounds a year in interest on government bonds.

 
Pensions expert Ros Altmann, director-general of Saga, said the decision not to alter RPI was "excellent news".

"To have radically changed the traditional inflation measure, on which many people's incomes depend, could have jeopardised the inflation protection inherent in many people's income arrangements," she said.

RPI is higher than CPI by 1.2% on average each year and much of this is down to the so-called "formula effect" - a gap created by the different methods used to calculate the prices of goods for CPI and RPI.

Traditionally, RPI has been higher because it includes mortgage interest payments, but as borrowing rates have been slashed in recent years, the formula effect is now the biggest factor behind the gap, accounting for a 0.9 percentage point difference between CPI and RPI on average.

Ms Matheson considered four different proposals in her review of RPI, one of which would be to cut out the formula effect completely - effectively reducing the rate of RPI by nearly a full percentage point.

While there was relief from pensioners and savers at her decision, it came as a surprise to many experts who had expected a radical change.

Philip Shaw, economist at Investec Securities, said: "We are surprised that the ONS has rejected the opportunity to fix the well-discussed flaws in the RPI and are a little dismayed that we will have yet another measure of inflation to contend with."

He said it was also surprising, given that the ONS has in the past made noticeable changes to the rate of inflation, such as the way clothing prices are calculated in 2010, which was a major reason behind the leap in the formula effect gap.

Ms Matheson has recommended making improvements to the way private housing rents are calculated for both CPI and RPI, so that a far broader range of sources is used to make it more representative.

Sajid Javid, economic secretary to the Treasury, confirmed the Government would continue to issue index-linked gilts linked to the RPI.

If the RPI had reduced, JP Morgan economist Allan Monks estimated it would have saved the Treasury between £3 billion to £4 billion in servicing its own debt.

But reduced returns on index-linked bonds would have been a blow to many investors, including more than 900,000 investors holding National Savings & Investments index-linked savings certificates.

Some might have welcomed a decrease in RPI, as train fare increases are based on the index, as are student loan repayments.

Some regulated utilities are based on RPI, such as water bills, while duty rates on alcohol, tobacco, gambling and fuel are also linked to the inflation measure.

PA

Voices
Scotland's First Minister Alex Salmond delivers his speech at the Scottish National Party (SNP) Spring Conference in Aberdeen, Scotland April 12, 2014.
voices
Arts & Entertainment
Jessica Pare as Megan Draper and Jon Hamm as the troubled, melancholy Don Draper
tvAnd six other questions we hope Mad Men series seven will answer
Life & Style
The new low cost smartphone of Motorola, 'Motorola Moto G', is displayed in Sao Paulo, Brazil on November 13, 2013. The smartphone, with dimensions 65.9mm W x 129.9mm H x 6.0 - 11.6mm D is equipped with a Qualcomm Snapdragon 400 with quad-core 1,2 GHz CPU, a 4.5-inch display and Android Operating System 4.3 and a suggested price of $ 179 USD.
techData assessing smartphones has revealed tens of millions of phones are at risk of being harvested
News
David Beckham is planning to build a stadium in Miami’s port for a new football team he will own
news... in his fight for a football stadium in Miami's port area
VIDEO
Have you tried new the Independent Digital Edition iPad app?
News
weird newsMan live-photographs cracking of mysterious locked box on Reddit
Sport
Oliver Giroud kisses the Arsenal badge after giving the Gunners the lead
sportArsenal 3 West Ham 1: Two goals from the German striker and one piece of brilliance from Giroud puts the Gunners back above Everton
News
Plans to decriminalise non-payment of television licence fees would cost the BBC £500m according to estimates drawn up within the Corporation
people
News
weird news
Arts & Entertainment
Seeing red: James Dean with Sal Mineo in 'Rebel without a Cause'
filmAs 'Rebel without a Cause' is re-released, Geoffrey Macnab reveals how its star James Dean perfected his moody act
News
Obesity surgery in rats has been found to change the way the body processes alcohol
news
Arts & Entertainment
Heads up: Andy Scott's The Kelpies in Falkirk
artThe Kelpies are the latest addition to a growing army of giant sculptures. But naysayers are asking what a pair of gigantic horse heads tells us about Falkirk?
Life & Style
US Airways has been at the centre of a Twitter storm after it responded to customer complaints with a graphic sexual image
techUS Airways takes an interesting approach to customer service
Arts & Entertainment
Philip Arditti as Yossarian and Christopher Price as Milo Minderbinder in Northern Stage's 'Catch-22'
theatre
Arts & Entertainment
The Purple Wedding: Joffrey and Margaery Tyrell tie the knot
TV The second episode of the hit series featured a surprise for viewers
Life & Style
Back to nature: women with body issues have found naked yoga sessions therapeutic
lifeDoing poses in the altogether is already big in the US, and now it’s landed here – in mixed classes
Independent
Travel Shop
the manor
Up to 70% off luxury travel
on city breaks Find out more
santorini
Up to 70% off luxury travel
on chic beach resorts Find out more
sardina foodie
Up to 70% off luxury travel
on country retreats Find out more
Have you tried new the Independent Digital Edition iPad app?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs General

Move from Audit to Advisory

£45000 per annum + benefits: Pro-Recruitment Group: Move from Audit to Advisor...

Management Consultancy - Operational Research Analysts

£35000 - £50000 per annum + Bonus + Benefits: Pro-Recruitment Group: You must ...

Secondary Teaching Assistant

£60 - £70 per day: AER Teachers: THE SCHOOL: This outstanding Secondary School...

Application Support Analyst (MS SQL, java based webserver, batch scripting)

£36000 - £40000 Per Annum On call allowance.: Clearwater People Solutions Ltd:...

Day In a Page

Homelessness: Why is the supported lodgings lifeline under threat?

Why is the supported lodgings lifeline under threat?

Zubairi Sentongo swapped poverty in Uganda for homelessness in Britain. But a YMCA scheme connected him with a couple offering warmth and shelter
A History of the First World War in 100 Moments: When the world’s biggest shed took over Regent’s Park

A History of the First World War in 100 Moments

When the world’s biggest shed took over Regent’s Park
The pain of IVF

The pain of IVF

As an Italian woman vows to keep the babies from someone else’s eggs, Julian Baggini ponders how the reality of childbirth is often messier than the natural ideal
Supersize art

Is big better? Britain's latest super-sized art

The Kelpies are the latest addition to a growing army of giant sculptures. But naysayers are asking what a pair of gigantic horse heads tells us about Falkirk?
James Dean: Back on the big screen

James Dean: Back on the big screen

As 'Rebel without a Cause' is re-released, Geoffrey Macnab reveals how its star perfected his moody act
Catch-22: How the cult classic was adapted for the stage

How a cult classic was adapted for the stage

More than half a century after it was published 'Catch-22' will make its British stage debut next week
10 best activity books for children

10 best activity books for children

Keep little ones busy this bank holiday with one of these creative, educational and fun books
Arsenal 3 West Ham United 1: Five things we learnt from the battle between the London sides

Five things we learnt from Arsenal's win over West Ham

Arsenal still in driving seat for Champions League spot and Carroll can make late charge into England’s World Cup squad
Copa del Rey final: Barcelona are paying for their complacency and not even victory over Real Madrid will put things right

Pete Jenson on the Copa del Rey final

Barcelona are paying for their complacency and not even victory over Real Madrid will put things right
Rafa to reign? Ten issues clay courts will serve up this season

Rafa to reign? Ten issues clay courts will serve up this season

With the tennis circus now rolling on to the slowest surface, Paul Newman highlights who'll be making the headlines – and why
Exclusive: NHS faces financial disaster in 2015 as politicians urged to find radical solution

NHS faces financial disaster in 2015

Politicians urged to find radical solution
Ukraine crisis: How spontaneous are the pro-Russian protests breaking out in Ukraine’s east?

Ukraine crisis

How spontaneous are the pro-Russian protests breaking out in Ukraine’s east?
A History of the First World War in 100 moments: The first execution at the Tower of London for 167 years

The first execution at the Tower of London for 167 years

A history of the First World War in 100 moments
Fires could turn Amazon rainforest into a desert as human activity and climate change threaten ‘lungs of the world’, says study

New threat to the Amazon rainforest:

Fires that scorch the ‘lungs of the Earth’
Liverpool, Chelsea and Manchester City: And the winner of this season’s Premier League title will be...

Who’s in box seat now? The winner of the title will be ...

Who is in best shape to take the Premier League prize?