After years of poor investment yields and miserably low interest rates, retirement savers now face an even bigger threat to investment growth.
A government boffin wants to scrap the retail price index (RPI), the old measure of inflation.
Replacing RPI with the current inflation measure, the consumer price index (CPI) would seem straightforward – except they measure inflation at different rates.
Why is this important?
Because direct benefit pension providers measure their returns and index-linking against the RPI instead of the CPI.
For instance, the state pension went up 2.5% from April 2018 based on the CPI annual rate of inflation in September 2017 – when the amount of increase is fixed.
Pressure to axe measure
Had the state pension linked to the RPI in September, the increase would have been 3.9%.
That’s because the RPI includes mortgage interest payments, but the CPI does not.
Historically, the RPI is always higher than the CPI.
Last year, BT tried to swap RPI for CPI as a workplace pension measure but failed. That’s because the RPI increase is written into the pension contract and judges at the High Court rejected the application as detrimental to retirement savers in the scheme.
The Department of Work and Pensions estimates companies could wipe up to £90 billion off their pension liabilities by swapping their inflation measure to CPI – money that is owed to pension savers.
Sir David Norgrove, chair of the UK Statistics Authority (UKSA), said told the House of Lords Economic Affairs Committee that he would abolish RPI if he could.
“I would give notice of probably 10 years, in the expectation that over that time prices would adjust, and people would be less harden by it,” he told the committee.
The Lords is looking into whether the government should scrap the RPI.
Norgrove highlighted another RPI issue – government bonds (gilts) are linked to RPI and The Treasury has already sold millions of pounds worth that do not mature until 2068 and the index will have to be maintained until then, he explained.
He also revealed the statistics body has discussed scrapping the RPI with the Bank of England and Treasury.
“I do feel things are beginning to move more quickly now,” he added.