Investors escape Retail Price Index reform threat to their pensions and savings

10th January 2013

The National Statistician has decided to leave the retail price index alone without adjustment despite the fact this causes statistical anomalies. There had been a chance that the calculations for RPI would have been adjusted making it behave much more like the Consumer Price Index. 

This would have been bad news for several groups of savers and investors including those with annuities or with scheme pensions linked to RPI and those with RPI linked bonds from National Savings & Investments. Over time, this would have led to a considerable deterioration in the value of these benefits. The risk has passed for now.

However, pension firm Hargreaves Lansdown also took the opportunity earlier this week to call for a pensioners' inflation index to which future payments could be linked. The Office for National Statistics already publishes such a measure – though only quarterly – and it clearly demonstrates that pensioners face a higher level of inflation than the rest of us as shown in figure one below. Effectively inflation is having a greater impact on the things pensioners buy than either the Retail Price index or the Consumer Price index indicate. 

However Hargreaves has also warned of another overlooked risk – that the triple lock on the state pension, which sees it rise by the highest of the Consumer Price Index, average earnings or 2.5 per cent – is unsustainable. At Mindful Money, having looked at HL's graph (figure two) looking at how the state pension would have risen in theory since 1996 had the triple lock applied, we tend to agree. We imagine this is all probably the stuff of nightmares at the Treasury. A state pension that increased under this system indefinitely is going to be regarded as unsustainable though many pensioners would welcome it of course.

As the firm's head of pension research Tom McPhail says: "This was a great opportunity for the Chancellor to align pensioners’ inflation proofing more closely with the actual reality of their expenditure and costs. RPI and CPI, which are used by the majority of pension schemes, are inadequate to offset the impact of inflation on pensioners. By contrast the ‘triple lock’ used on the state pension, whilst very generous to pensioners, will be ruinously expensive for the tax payer in the long run. It makes far more sense for everyone involved to use one Pensioner Inflation Index for all these payments".

The problem is that in removing one or two of the triple locks then the state pension could be single locked, for example, to CPI alone. That would probably see a significant deterioration in its value. Hence Hargreaves shrewd suggestion for a new index which Mindful Money thinks makes a lot of sense. 

 

 Figure one

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 Figure two

Description: Description: Effect of the triple lock over 15 years

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