Friday 18 November 2011

The Great Pension Robbery Explained. Part 1: RPI to CPI

In the June 2010 Budget the Chancellor announced without consultation that the Government will “switch to a system where we up-rate public service pensions in line with consumer prices rather than retail prices”. That is a switch from the Retail Price Index to the Consumer Price Index.CPI and RPI are calculated from the same underlying price data but there are significant differences, notably the following:

  1. Various housing elements included in RPI are excluded from CPI including mortgage interest payments and council tax.

  2. CPI is generally calculated using a geometric mean whereas RPI in contrast is calculated using an arithmetic mean.

  3. In classifying goods and services, CPI follows an international classification system whereas RPI follows its own system.

As a result of these differences, since 1997 (when the 12 month rate of change for CPI was first available), RPI has been on average 0.8% a year higher than CPI. The repercussions for pension scheme members are therefore somewhat obvious, thousands cut from the value of individual public sector pensions at a stroke, without consultation or negotiation.

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