Merryn's Blog

Why pensioners will soon be richer

The government wants to move the statutory inflation measure for pensions to the CPI from the RPI. That means falling house prices could be good for pensioners.

Much fuss on Radio 4's Today programme this morning about the shift in the statutory inflation measure for final salary pensions from the RPI (Retail Prices Index) to the (currently lower) CPI (Consumer Prices Index).

I find the constant goal-post shifting done by all governments as irritating as anyone else, but that's not the main complaint being aired this week. Instead there's a general concern that the change will make pensioners poorer.

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I wouldn't be so sure. For starters it won't affect everyone in a final salary scheme. Many will already have clearly stated benchmarks of their own (RPI, RPI or 5% whichever is lower and so on) that they can't or won't change simply because the government has altered the base obligation for pension inflation tracking.

Yet also, it isn't a given that the CPI will always be lower than the RPI. It has been for a long time and it's very probable that this is one of the reasons why Gordon Brown adopted it as the Bank of England's official inflation measure. Though as we surely know by now, extrapolating historic statistics into the future doesn't always work.

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Think about the components of CPI and RPI. The one that generally causes the divergence is housing.

In June for example, CPI was 3.2% and RPI was 5%. The pressures on both measures such as rising air transport and insurance costs were much the same. But, says the Office for National Statistics, "additionally, there was upward pressure to the change in the RPI annual rate from housing", where prices have risen over the last 12 months. Now look back to last year when house prices were falling, and you can see that at the time RPI was lower than CPI.

So to the future. The Royal Institution of Chartered Surveyors has just added to the Everest of evidence that all is not well in the housing market with news that, by its measures, house prices fell last month for the first time in a year.

If that decline keeps going and if it does so for long, as we think it will (see almost every blog post on here) surely RPI will fall below CPI again and stay there. That will make pensioners with an income that's linked to the CPI rather than the RPI not poorer, but richer.

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