View more on these topics

Adrian Boulding: Difference between inflation measures balloon over time  

If you’re building an investment portfolio for retirement savings, it’s a good idea to include some assets with returns that are linked to inflation. Index-linked gilts and National Savings Certificates are two examples. However, increasingly some of these assets remain linked to the older RPI while others link to the newer CPI.

The selection of inflation measure matters because RPI has proved consistently higher than CPI. RPI, at the latest point of measurement, was 3 per cent. CPI for the same 12-month period to April 2019 stood at 2.1 per cent, according to the ONS.

Then there’s the newest inflation index of all, CPIH – CPI plus Housing – which includes owner-occupiers’ housing and council tax costs, in addition to the basket of goods and services selected for CPI. It stood at 2 per cent for the year to April 2019. So why is RPI so much higher than CPI and CPIH, and why does this matter for pension savings? The answer lies partly in the baskets of goods and partly in the calculation method.

Both the CPIH and CPI baskets contain items excluded from the RPI basket, such as university accommodation fees and unit trust commissions. Similarly, the RPI basket contains items, such as estate agent fees, excluded from the CPIH and CPI baskets. The precise weights attached to individual items also differ, but traditionally RPI has placed more emphasis on the costs of running and maintaining a home.

There is one other key difference – both indices build up a stratified sampling approach, but the way CPI is calculated means it returns a lower answer with consumer substitution effects overlaid onto the basket of goods. It accounts for the fact that, when prices rise, some consumers stay brand loyal while others switch brand to find the price they were previously paying.

Adrian Boulding: CDCs offer alternative to threats of pension freedoms

Given the consistently higher rates of RPI, it’s increasingly controversial that this index is still used to calculate interest on student loans and annual train fare hikes while inflation-based increases in benefits paid out by the government are generally now pegged to the lower CPI rate. This includes the triple-lock increases to the state pension.

Issuers may hope that, with pension-held assets linked to CPI , the difference is so small investors won’t notice. That might be true if you were investing only for a year or two but the power of compound interest means the difference rolls up to become very significant over time.

Actuaries for bank-note printer De La Rue, which recently won a contract to supply polymer for the new £50 note, shaved a cool £80m off its scheme’s liabilities by changing the pensioner indexation from RPI to CPI. That’s out of a total liability figure of £1bn for De La Rue’s closed final salary scheme. This means the actuaries think their pensioners will, over their retirement, be 8 per cent worse off than with RPI indexation.

This isn’t a criticism of De La Rue’s scheme. But it’s a great example of how, in long-term savings, a lot of little differences can add up to a significant change in living standards for future pensioners.

Adrian Boulding is director of retirement strategy at Dunstan Thomas

You can follow him on Twitter @AdrianBoulding

Recommended

Marketing firm behind London Capital & Finance connected to another mini-bond provider

Another loss-making mini-bond firm is employing the same marketing company that promoted investments on behalf of London Capital & Finance before it collapsed, Money Marketing has learned. Blackmore Bonds Plc, which issues unregulated bonds known as “mini-bonds” paid more than £5m to Surge Financial, an online marketing company, which made also millions helping LCF raise […]

1

SFO charges former director of ethical investment scheme

The Serious Fraud Office has charged a former director of ethical investment scheme Global Forestry Investments in relation to alleged frauds concerning the company between August 2010 and December 2015. Andrew Nathaniel Skeene has been charged with conspiracy to defraud, forgery, and misconduct in the course of winding up. Skeene was arrested at Heathrow Airport […]

Wind-Green-Environment-Ecology-Windmill-700.jpg
1

IFAs’ interest in ESG investment rises three-fold in past year

Financial advisers’ interest in environmental, social and ethical investment rose dramatically over the past year, according to figures from Fund EcoMarket. The site, which is designed to help intermediaries navigate the world of ESG retail investment, has seen its number of visitors rise three-fold, as it registered 9,400 unique users in the 12 months to […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers. Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and thought leadership.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com