Bye bye RPI
Last week Rishi Sunak delivered his eagerly anticipated spending review. We were not expecting good news and we did not get any. Amongst the headlines were that we will suffer our deepest recession since the Great Frost of 1709 and a public sector pay freeze for all non-health roles.
Hidden in amongst the detail was the confirmation that the widely used inflation reference index of RPI would be scrapped from 2030 and replaced by CPIH. This has been discussed previously and was potentially going to come in from 2025.
Definitions:
- RPI – Retail price index – this index tracks the cost of a fixed basket of goods over time but no housing input.
- CPIH – Consumer price index plus housing – this tracks a slightly different basket of goods but includes a housing element (living costs not house price movements). This measure is seen as more realistic to actual inflation nowadays.
Why does this matter?
Historically CPIH typically runs about 0.8% below RPI.
So what?
Well RPI is the reference rate used in calculating payments of approximately two thirds of final salary pension schemes, some annuity payments and the income and capital returns linked to the majority of older index linked gilts. It is estimated that the change in the measure could cost index inked gilt holders up to £96bn.
A lower rate means a lower payment for holders of the above securities. The government has stated that no compensation will be available to those impacted.
The relentless war on savers continues.