CPI and fear over the rising cost of living

Today saw the coincident publication of the DWP consultation on extending the move to the Consumer Price Index to private sector occupational schemes, following the government’s announcement in July that it would be doing so for benefits and public sector pension schemes, and for related private sector schemes, as well as some research from insurance company Aviva demonstrating that the over-55s are increasingly fearful of the rising cost of living.

The move to CPI indexation remains unwanted, nasty and mean spirited, and this is in no way ameliorated by the DWP’s otherwise welcome recommendation in today’s consultation not to move to enforce the switch on all private sector schemes via over-riding legislation. Having seen the move elsewhere, private sector schemes may already be considering such a move, so the absence of legislative compulsion is small compensation for the compulsion of circumstances. With CPI being in the long-run lower than RPI by about 0.75% per year, the move will cost pensioners on even moderate pensions as much as £25,000 during their time in retirement. In the public sector, and concerning those on benefits, the switch essentially makes pensioners pay for the excesses of the bankers which have been so costly to the economy while, in the private sector, giving windfall gains to companies which are also directly affected by the move.

The move was predicated on the basis that the Retail Price Index is not a suitable measure of inflation for pensioners because it includes housing costs and, apparently, 70% of pensioners don’t have mortgages. Well, that implies that 30% do – and that’s a number that’s only likely to grow in the future – while other aspects of housing costs, such as council tax and rent, are also excluded from the CPI. Housing costs actually form a large part of pensioners’ expenditure: the most recent ONS Pensions Trends publication estimates that 17% of the expenditure of households headed by someone aged 65-74 is on housing, while the Aviva study also quotes a figure of 18% (with housing actually taking the largest share of the expenditure of the over-55s). The Royal Statistical Society has called for a review of the measurement of inflation, sparked off not least by the increasing prominence of CPI ‘even though it is not necessarily the best index for all purposes.’ And we know that pensioner inflation is anyway higher than RPI, as a result of typical pensioner expenditure being focused on the more high-rising items.

In the context of the prospect of extensively lower indexation applied to pensions in the immediate future, it is no wonder that pensioners are becoming more and more worried about the cost of living: three-quarters, according to the Aviva study, say that the cost of living was their biggest fear over the next six months while 70% say that it is their biggest fear over the next five years – a rise in the latter case of no fewer than 52 percentage points since May 2010. You could ask for no clearer view about the impact of the coalition government on pensioners than that.

Thankfully, the Office for National Statistics is considering how housing costs can be brought into RPI (para 9.10), while the UK Statistics Authority has this week published a programme of work for ONS which includes the accomplishment of such a move within two years. If the government doesn’t interfere, this will row back some of the difference between RPI and CPI, thus taking some of the sting out of the move, although the bulk of the difference (arising from the different mathematical construction of the CPI) will remain. Pensioners are right to be fearful of their future under the ConDems – it will be one in which they are very much worse off.

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