Wednesday 25 November 2020 4:39 am

DEBATE: Should Rishi Sunak scrap the RPI inflation measure in today’s Spending Review?

Angus Hanton is co-founder of the Intergenerational Foundation
and Tom Selby
Tom Selby is senior analyst at AJ Bell

Should Rishi Sunak scrap the Retail Prices Index (RPI) inflation measure in today’s Spending Review?

Angus Hanton, co-founder of the Intergenerational Foundation, says YES.

We need to say RIP to RPI. Why? Because the use of the Retail Prices Index (RPI) is based on a flawed methodology — one which disproportionately impacts younger generations. 

From student loans to rent reviews, mortgages to train fares, the use of RPI as a metric makes inflation appear higher than it actually is and has led to price hikes during a period of historically low inflation and ultra-low bank rates.

The Consumer Prices Index (CPI) replaced RPI as the government’s predominant measure of inflation way back in 2003, and now a variant including owner occupiers’ housing costs (CPIH) is widely used. The average 0.8 per cent difference each year between this and the RPI rate adds thousands of pounds of interest on to student loans and rents, thereby trapping younger borrowers into paying more. Successive governments — both left and right leaning — have consistently chosen to ignore this unfairness.

The use of RPI, meanwhile, in calculating defined benefit pensions has served to do the opposite for older generations: ratcheting up their claims during the same period of unprecedentedly low inflation.

The time has come for greater intergenerational fairness. With younger people likely to be paying for the costs of shielding the old from Covid-19 for decades to come, replacing RPI with CPIH is a far fairer way to balance wealth and outgoings among young and old.

Read more: Retirees to be hit by inflation change in Rishi Sunak spending review

Tom Selby, senior analyst at AJ Bell, says NO.

Proposals to abolish the RPI inflation measure risk causing colossal damage to people’s pensions and investments. This is because, as things stand, RPI-linked increases are written into lots of financial services contracts.

There are, for example, defined benefit schemes where scheme rules require members’ retirement incomes to rise in line with RPI. Annuities have also been sold on the promise of RPI protection, while index-linked gilts, which are held by huge numbers of investors either individually or via their pensions, are also pegged to RPI inflation.

If these contracts are to effectively be torn up and RPI replaced with CPIH, millions of savers and investors stand to lose out as a result.

As CPIH tends to be around 0.8 percentage point lower than RPI, over time investments or pension incomes linked to CPIH will grow more slowly than they would if they were linked to RPI.

Estimates suggest this could cost investors £122bn overall. For someone with a £20,000 a year RPI-linked pension, the loss of income over the course of a 30-year retirement could be an eye-watering £119,000 — a huge hit, and one savers may not be willing to accept lying down.

Read more: Rishi Sunak’s spending review: Three things to look out for

Main image credit: Getty

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