Inflation changes could hit savers

People saving for their pension could be the group hardest hit by proposed changes to a key inflation measure, the National Association of Pension Funds has warned.

Changes to the way the retail prices index (RPI) rate of inflation is calculated, which could lead to it being more in step with the consumer prices index (CPI), are currently being considered.

Because CPI is on average 0.9% lower than RPI, if the two were brought closer together RPI could slow down, which would have a negative effect on future increases in private sector pensions.

Public sector pensions would not be affected as they were switched by the Government earlier this year and are now linked to CPI.

Policy director at the NAPF, Darren Philp, said: 'Pension funds are major investors in government debt and changes to index-linked bonds could have far-reaching impacts on those investments.

'It could also alter the amount by which pensions being paid to former workers are increased each year.'

Changes to RPI would also affect the value of inflation-linked savings certificates and index-linked bonds, or gilts, issued by the Government, but could benefit rail passengers as around half of all fares are linked to July's RPI inflation rate.

The Office for National Statistics (ONS) has asked for views on the changes, with the consultation closing on November 30 and any recommendations being published in January.

After the consultation the ONS will decide whether to leave the formulae as they are; make partial changes to RPI, in order to reduce the gap; or change the construction of RPI to remove the formula effect altogether.

Once it has made its recommendation the Bank of England will be asked to decide if the changes need the approval of the Chancellor.

The ONS hopes to implement any changes from the February inflation release, which is published in March.

Copyright Press Association 2012