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Change from RPI to CPI

The Tory/Lib Dem coalition government changed the link from Retail Price Index (RPI) to Consumer Prices Index (CPI), for all public sector schemes going forward in January 2011.

This will automatically lower the annual increases to pensions and means that pensions will not keep up with inflation. This change will also affect USS pension scheme as its rules are directly linked to the Pension Increase Act.

Why does this matter?

Both RPI and CPI measure different items to see what is going up. CPI does not include house prices as there was no agreement within Europe on how to do this, although there is likely to be an agreement in 2013.

RPI and CPI are also measured in different ways. RPI takes all the increases and divides it by the number of items. CPI takes all the increases and square roots them by the number of items. These different methods mean that CPI would always be 0.5 % less than RPI even if it measured the same things. This change will ensure pensions will not keep up with inflation and will lose their value more quickly.

Consultation

The government does not have to consult on this change as they already have the power to make it; so they did not consult on this.

What will it mean?

  • In FE a lecturer with a £10,000 pension would lose £36,000 or more over the average 25-year retirement.
  • In HE a lecturer with a £18,000 pension would lose £65,000 or more over the average 25-year retirement

Can you afford that?

The comparison of RPI/CPI September figures since 2000 has been as follows:

RPI+3.3%+1.7%+1.7% +2.8%+3.1%+2.7%+3.6%+3.9%+5.0%-1.4%
CPI+1.0% +1.3%+1.0% +1.4%+1.1%+2.5%+2.4% +1.8%+5.2%+1.1%


A revised CPI to include housing costs

The Coalition Agreement 'Our Programme for Government' said: We will work with the Bank of England to investigate how the process of including housing costs in the CPI measure of inflation can be accelerated. The UK Statistics Authority has said: We believe that the CPI should become the primary measure of consumer price inflation but only when the inclusion in the index of owner occupiers' housing costs has been achieved. The Government has said: As and when the Office of National Statistics comes up with alternative measures, we will certainly look at them, but that is without prejudice at this stage because the work is ongoing.

However, the necessary work is not expected to be completed before the middle of 2012. Any revised CPI is expected to fall between RPI and CPI, perhaps halfway, but it is too early to say.

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