RPI is a costly way to track inflation – the sooner the Government can kill it off, the better
A court ruling has snatched as much as 20pc of retirement wealth from more than 10 million pension savers.
The case surrounds the decision to scrap the Retail Prices Index (RPI) measure of inflation which is still used to increase gold-plated private pensions every year.
The Government wants to abandon RPI because it is “flawed” and now exaggerates the true cost of rising prices, but the trustees of three pension schemes – whose members will be poorer without RPI – argued the shift was being done unlawfully.
The High Court judge rejected the claim in a move that will cost the average pensioner in a RPI-linked scheme 10pc of their retirement income.
The change may come as a shock to many retirees, but it has been a long time coming. The accuracy of RPI, which was used as the UK’s official inflation measure for nearly half a century, has been in doubt for too long now.
Yet despite known flaws with the calculation, it has been continually used to ramp up pensions at above-inflation rates for baby boomers, whilst simultaneously making graduates pay more interest than they should on student loans.
RPI is also responsible for pushing up rail fares at an exaggerated rate and lumbering households with bigger bills for mobile phone contracts.
The Government wants to replace RPI from 2030 with a version of the Consumer Prices Index that includes housing costs (CPIH). The formula behind RPI, which was used as the UK’s official measure for nearly 50 years, now means it typically skews inflation to be around 1 percentage point higher than the more reliable measure.
It means that for years, retirees have been receiving an extra 1 percentage point on their pension pay while an extra 1 percentage point has been added to the bills of commuters and workers.
Scrapping the obsolete measure will also save the taxpayer billions of pounds as many pension schemes have colossal sums invested in Government bonds that pay out in line with RPI.
The Office for National Statistics has said RPI is a “very poor measure of general inflation” that can greatly overestimate or underestimate the impact of rising prices.
Economist Paul Johnson, who carried out a review of UK inflation statistics in 2015, said RPI was “not fit for purpose”. And former Bank of England governor Mark Carney described the measure as “meritless”.
Yet despite this, gold-plated private sector pensions will be upgraded in line with RPI for another eight years (albeit capped at 5pc) – even after the High Court ruling.
The state pension is no longer linked to RPI, and neither are public sector pensions after reforms in 2015.
It is clear that RPI is a costly and divisive way to track inflation, the sooner the Government can kill it off, the better.
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