7th January 2013
The firm has warned that even a small change to RPI could amount to a stealth attack on pensions.
HL argues that the Office for National Statistics already compiles a quarterly measure of inflation for pensioners based on a more appropriate basket of goods – which is often much higher – sometimes four per cent higher – than either of the two commonly used inflation rates.
It argues that the ONS could endorse and publish a monthly pensioners’ inflation index which could be used to set benefit levels for both state and private pensions.
The firm says that this would mean pensioners are not underpaid when their basic needs are outstripping the retail price index.
However the firm says it would also free the state pension from what is known as the triple lock.
This is a Government promise that the state pension will be upgraded by the greater of earnings growth, the consumer price index or 2.5 per cent each year.
The firm believes this triple lock, for all its electoral appeal, will eventually prove to be unsustainable and that a future government will have to abandon it.
Between 1996 and 2011 for example, the triple lock guarantee would have resulted in a state pension increase of 74 per cent despite none of the underlying measures increasing more than 45 per cent. But it could be bad news for pensioners if the government were to choose to follow CPI or indeed a reformed RPI that behaved more like CPI some time in future.
The National Statistician has been asked to report on the options for reforming RPI on Thursday (January 9th). Hargreaves Lansdown is concerned about the impact particularly on RPI-linked annuities but it could also have an impact on a host of other investment and savings products including index-linked government bonds, NS&I index-linked certificates and payments from final salary pension schemes.
Of less concern to pensioners are student loan repayments – indeed they may welcome a lower rate of increase – as may everyone else if alcohol, tobacco, gambling and fuel duties were to increase at a lower rate of RPI.
Whether wholesale changes are justified, there are definitely anomalies between the two indices.
RPI does not just calculate the price of different goods and services. It calculates the price using a different formula, producing for example a very different figure for clothing. The options for reform are listed below.
But if option four were chosen it could have a big impact on future pension incomes potentially cutting RPI by 0.9 per cent. As HL notes, a relatively small amount could have a big impact long-term.
HL has worked the example of the best RPI-linked annuity on the market available on the 3rd January this year. This was paying £3,663 a year to a 65 year-old, based on an original pot of £100,000. After twenty years of increases at this lower level of RPI, the pension could fall by more than £1,000 a year paying £5,500 as opposed to £6,560. Over those twenty years, this amounts to £9,500 less which is certainly food for thought.
Hargreaves Lansdown head of pensions research Tom McPhail says: “This kind of change can prove to be the most damaging of stealth attacks on pensioner incomes. It appears innocuous but over an entire retirement it can slowly deprive pensioners of thousands of pounds.”