Pension holders and savers: beware of an RPI inflation change

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9 JANUARY 2013

A change to the way an inflation measure is calculated would mean another 'hit' for private sector pensioners and savers, warns the boss of the world’s largest independent financial advisory group.

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The comments from Nigel Green, the chief executive of the deVere Group, come a day before the Office for National Statistics (ONS) publishes its recommendations (Thursday 10 January 2013), following its consultation on changes to the Retail Price Index (RPI). It is widely expected to recommend a change in the formula to calculate the RPI to bring it more in line with the CPI (Consumer Price Index).

The CPI is, typically, 0.5 per cent to 1 per cent lower than the RPI, and the Office for Budget Responsibility suggests that over the coming decade, the CPI will be 1.4 per cent lower than the RPI.

Mr Green says: “If the ONS recommends this change, and such recommendations are then implemented by the Chancellor, George Osborne, it would be another hammer blow for pension holders who are still in schemes that offer RPI increases, as their annual pension increases would be slashed overnight. Savers and those who invest in inflation-linked investments would be similarly affected.

“The switch could also adversely effect returns on government bonds, or ‘gilts’. If gilts take a hit, deficits in company pension schemes would drastically increase as they, averagely, have around 50 per cent of their assets in gilts. Naturally, any negative changes to these returns would be a huge blow to pension schemes and their sponsoring companies. This severe strain could be enough to force many schemes ‘over the cliff,’ leading to the sponsoring company going bust as a result.”

He adds: “Millions of people have made important decisions on their futures based on the continuation of RPI and a switch to bring it more level with CPI could have significant, adverse effects on their retirement incomes – yet, alarmingly, few pension holders know about this, and even fewer, at the moment, are exploring the options to mitigate the effects.

“The government has shown real intent on cutting costs and raising much-needed revenue but, unfortunately, it is retirees who are feeling the full force of the government’s cost-saving measures. As so often is the case, it is the people who did not cause the economic woes who suffer.”

Any RPI changes would come into effect in March 2013.

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