All entries for Tuesday 12 June 2012

How a small change in the RPI formula can be worth billions

As part of its reform of pension schemes the government changed the way it measures price inflation. Previously pensions used to be uprated annually by the Retail Price Index but George Osborne changed that to the lower Consumer Price Index. The CPI is usually lower than the RPI by an average of 0.7 percent.

This apparently minor technical change has reduced the inflation proofing of pensions in the public sector and most final salary pensions in the private sector. Unions have been fighting this alongside the other pension changes.

Now the Office for National Statistics is revising the formula for the RPI to make it closer to the CPI, so the whole debate will become academic.

Technically it is all to do with whether you use an arithmetic mean or a geometric mean to calculate the average movements in prices.

It is remarkable that such an apparently small change can make a difference of £20 billions of pension liabilities.

See the Financial Times article

Dennis Leech : 12 Jun 2012 14:49 |  Tags: Cpi Pensions Rpi |  Comments (0) |  Close comments |  Report a problem