The Office for National Statistics (ONS) is beginning a consultation into the way that a key inflation measure is calculated that could have an impact on pension payments and the value of savings and investments.
The ONS is considering making changes to the way the retail prices index (RPI) is calculated. The changes would make the RPI inflation measure move more solely and be closer to the consumer prices index (CPI) measure of inflation.
The difference between the two measures is that the RPI includes the cost of a mortgage and rental payments. This means that the RPI is usually higher than the CPI measure of inflation. The two methods also use slightly different mathematical formulae to calculate the rise in prices of the goods and services being tracked.
There has been an average difference of 0.9 per cent in the two measures since 1996. However, the difference is currently less than that with August’s inflation figures showing CPI at 2.5 per cent and RPI at 2.9 per cent.
But the Office for Budget Responsibility (OBR) believes that the gap is likely to get wider, predicting that the average difference will be 1.4 per cent during the rest of this decade.
The proposed changes would be likely to lead to a cut in pensioners’ incomes.
Last year, the government changed the way public sector pensions and some benefit and tax credit increases were measured, linking them to CPI rather than RPI, meaning increases were lower than they otherwise would be.
Although the ONS is independent from the government, critics say that the latest review could help the government save more money as it battles to meet its own deficit reduction target.
The ONS says that its review is just to check if there needs to be any change.
Darren Philp of the National Association of Pension Funds (NAPF) 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."
Savers and investors could be affected too. Changes to the way RPI is calculated would affect the value of inflation linked savings certificates and government issued index linked bonds and gilts.
The ONS is going to assess whether there should be no change at all, partial changes to the formula used to calculate RPI which would make the two measures closer or whether to remove the formula affect altogether which would bring the two measures much closer together.
Whatever is decided would bring the two measures closer together by reducing RPI and this would lower future increases to pensions based on RPI.
It would also lower the returns of inflation-linked policies which have been purchased through National Savings and Investment (NS&I) and the return on index-linked bonds sold to investors by the government.