• A Government consultation which could see the widely discredited RPI inflation measure abolished and replaced with CPIH closes tomorrow (21st August)
• The ABI has issued a press release estimating that scrapping RPI and replacing it with CPIH in 2025 could cost savers and investors £122 billion
• Even if the move is made in 2030 the value of pensions and investments could be slashed by £96 billion
• Investors in index-linked gilts and defined benefit pension scheme members would be among those hit if RPI is abolished; people with student loans and rail passengers stand to benefit
• This comment is for use after the embargo on the ABI press release of 00:01 Friday 21 August
Tom Selby, senior analyst at AJ Bell, comments:
“Savers and investors stand to lose upwards of £100 billion if the Government and the UK Statistics Authority press ahead with plans to ditch the widely discredited Retail Prices Index (RPI) inflation measure and replace it with CPIH.
“The impact of such a move will be felt by a huge number of people in different ways. There are, for example, defined benefit schemes where scheme rules mandate members’ retirement incomes rise in line with RPI.
“If these contracts were ripped up and RPI replaced with CPIH – which tends to be lower – it would effectively represent a stealth cut to people’s hard-earned retirement pots. Any annuities linked to RPI would also be worth less if this link was downgraded to the CPIH inflation measure.
“Anyone invested in index-linked gilts - including individuals and pension funds - would also see the value of their holdings tumble if the Government applied a blanket overnight switch from RPI to CPIH.
“The big question the Government needs to answer is the extent to which it will mitigate any negative impact on people with pensions and investments explicitly linked to RPI. One option in this regard would be to maintain a notional RPI which these contracts could then adopt, although this might mean RPI remains part of the system for decades.”
Student loans and rail fares
“Ditching RPI could be good news for young people and commuters, however. The Government has doggedly, and some would say cynically, continued to link things like rail fare increases and student loan repayments to RPI, ensuring a quiet and creeping boost to Treasury coffers.
“Conversely, the state pension, benefit payments and tax thresholds have been linked to the lower CPI measure, leading to accusations of ‘index shopping’ by successive administrations.
“Moving away from RPI to CPIH could precipitate an end to this approach and provide a much-needed boost for indebted students and rail passengers.”
