Index-linked savers and pensioners can breathe a sigh of relief. Statisticians have defied calls to fiddle with Retail Price Index calculations that would have saved the Government, National Savings and pension funds billions of pounds.
But don’t expect a sudden jump in your savings income. However inflation is measured, most savings accounts are still paying negative interest rates. With prices rising at around 2.7%(CPI), savers are effectively losing money on their cash accounts.
The Office for National Statistics has been looking at inflation and how the different indices, the Retail Price Index, and the slower rising Consumer Price Index, are calculated.
Because of the way the two indices are worked out, a gap of around 1.2% per year exists between the two. That may not sound like much but it is important.
Pensioner payouts and index-linked investments, such as National Savings & Investments, tend to follow the RPI. Had the ONS decided to fiddle with it, anyone in retirement could be worse off in the future as the key inflation measure might have been lower. More importantly the credibility of the guarantee would have been undermined forever.
Lucky for them, the ONS has decided to leave RPI alone. So nearly one million NS&I savers with £25 million in index-linked savings are safe for now.
But the ONS also effectively admits that the way RPI is calculated is flawed. So a new index, RPIJ, is coming in alongside the existing inflation measures. Anyone with a final-salary inflation-linked pension needs to take note of whatever the statisticians come up with for RPIJ. And so should anyone whose pay increases are linked to inflation too.
Although National Savings and the Government will stick with old-RPI for bonds and gilt issues, pension schemes might not. That could mean lower inflation-linked increases in future and therefore reduced pension payouts.
Just to confuse matters, there’s a new version of the Consumer Price Index on the way too. The way that the value of the CPI is calculated from a basket of goods and services is different from RPI, but in line with indices used in Europe. But it excludes housing costs which, as we all know, are a big part of most people’s monthly budget. So CPIH (H for Housing!) is coming too. Any switch to that could change the way State benefits, State pension and civil servant pensions are calculated in future.
- Savers are safe - for now. National Savings will continue to use the old, higher inflation measure on index-linked bonds.
- Company pension and final salary scheme members need to check whether their pension fund intends to switch to the new, lower measure of Retail Price Inflation - called RPIJ.