My pension regulations show annual increases based on the consumer price index.
I understand that from 2030 the CPIH (Consumer Price Index including the housing costs of own residents) will be introduced, which is lower than the RPI.
Will an RPI continue to exist? How can I protect this benefit?
SCROLL DOWN TO FIND OUT HOW TO ASK STEVE YOUR PENSION QUESTION
Steve Webb replies: The question of which inflation index is appropriate to increase pensions (and benefits) each year has been a source of considerable controversy in recent years.
For many years, the inflation measure used for a variety of purposes was the Retail Price Index (RPI).
Over time, however, concerns have arisen about whether the RPI was an accurate way to measure the change in prices in the economy.
Do you have a question for Steve Webb? Scroll down to see how you can contact him
Back in 2011, the government changed the official inflation benchmark used for annual increases in government pensions (and associated private pensions) from RPI to the more internationally standard consumer price index (CPI).
In 2013, the RPI lost its status as an official ‘national statistic’, and in a 2018 article Shortcomings of the retail price index as a measure of inflation the Office for National Statistician said: ‘…we do not think this is a good measure of inflation and discourage its use’.
There are several reasons why RPI is no longer considered a reliable measure of inflation, but the biggest has to do with problems with the ‘formula’ for converting price increases of individual goods and services into an overall inflation measure.
To give an example, if prices double one year and halve the next, you would expect the inflation rate over those two years to be zero.
But the way the RPI is calculated means that inflation over the two years taken together would be positive.
Partly for this reason, a 2012 study of international approaches to measuring inflation found that none of the thirty countries surveyed applied the formula used in the UK RPI measure.
In summary, statisticians have been of the opinion for some time that the RPI is not an accurate measure of inflation and is not in line with international good practice.
Given all these concerns, it might be fair to ask why the Office for National Statistics continues to publish the RPI at all?
The main answer is that RPI is written into many financial contracts, especially government bond rates, some of which were entered into many years ago in anticipation of an RPI-linked return.
As a result, ONS has continued to publish monthly RPI figures, despite being skeptical about what they show.
Ultimately, the ONS decided that this situation could not continue and made the decision that the way RPI is calculated would change during 2030/31.
Something called ‘RPI’ will still be published, but the underlying calculations will change to align with the calculations of CPI(H) – the consumer price index, including a measure of housing cost inflation.
This measure is believed to provide a more accurate measure of inflation than the current RPI.
The Office for Budget Responsibility recently estimated the long-term difference between RPI and CPI inflation that inflation based on the new RPI measure (based on CPIH) will be approximately 0.5 percent lower per year than based on the old definition.
Once the switch is made there will no longer be a separate ‘old’ RPI calculation, so I would expect your pension scheme to simply continue to link your annual increases to the RPI, but this will now be the new one – and it is widely expected that this will also be the case. be slightly lower – measure.
(What happens in some pension schemes may differ depending on the details of their governing documents.)
As for what can be done about all this, a legal battle has been launched against this decision by a group of pension funds that are major holders of RPI-linked government bonds.
They estimate that the collective loss to the schemes could be as much as £100 billion if interest rates on inflation-linked government bonds were cut as a result of the change.
However, this ‘judicial review’ was rejected in 2022 and it seems unlikely that further change is possible.