The Office of National Statistics (ONS) has recommended that a new index be published, after it concluded that the formula used to produce the retail prices index (RPI) does not meet international standards.
A new RPI-based index will be published from March 2013 using a geometric formulation (Jevons), known as RPIJ.
A consultation on options for improving the RPI was prompted by the need to address the gap between the estimates produced by the RPI and the consumer prices index (CPI).
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The ONS research programme found that use of the arithmetic formulation (known as the Carli index formula) in the RPI is the primary source of the formula effect difference between the RPI and the CPI, and that this formulation does not meet current international standards.
In developing the recommendations, national statistician Jil Matheson also noted that there is significant value to users in maintaining the continuity of the existing RPI’s long-time series without major change, so that it may continue to be used for long-term indexation and for index-linked gilts and bonds in accordance with user expectations.
Therefore, while the arithmetic formulation would not be chosen were ONS constructing a new price index, the national statistician recommended that the formulae used at the elementary aggregate level in the RPI should remain unchanged. She recommended that the RPIJ sit alongside this.
Joanne Segars, chief executive at the NAPF, said: “Pension funds are relieved that RPI has been left intact because rewiring this crucial measure would have created upheaval for both inflation-linked pension fund investments, and the income of current and future pensioners.
“Reworking RPI would have given many pension funds some much-needed breathing space by reducing their liabilities, but it would also have cut the growth in pensions paid to former workers.
“A pensioner with an average RPI-linked final salary pension of £7,600 could have seen a £20,000 fall in their income over a 20-year retirement.
“The ONS is still doing work on overhauling CPI, so this was the wrong time to be reviewing RPI, and investors do not welcome the uncertainty and market disruption this announcement has created. Leaving RPI alone is the best option.”