Is it true pensions will not be elevated by RPI inflation after 2030? STEVE WEBB replies

On Jan 13, 2025

Updated: 07:00, 13 January 2025

My pension rules show annual increases based upon the Retail Price Index.

I understand that from 2030 CPIH (Consumer Prices Index including owner occupiers’ housing costs) will be introduced which is less than the RPI.

Will there continue to be an RPI? How can I protect this benefit?

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Steve Webb replies: The issue of which inflation index is appropriate to use to increase pensions (and benefits) each year has been a source of considerable controversy in recent years.

For many years, the inflation measure used for a wide range of purposes was the Retail Prices Index (RPI).

However, over time there have been growing concerns about whether the RPI was an accurate way of measuring the change in prices in the economy.

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As long ago as 2011 the Government changed the official inflation benchmark used for annual increases to public service pensions (and related private pensions) from RPI to the more internationally standard Consumer Prices Index (CPI).

In 2013, the RPI lost its status as an official ‘national statistic’, and in a 2018 article Shortcomings of the Retail Prices Index as a measure of inflation the Office for National Statistician said ‘..we do not think it is a good measure of inflation and discourage its use’.

There are several reasons why RPI is no longer regarded as a reliable measure of inflation, but the biggest one relates to problems with the ‘formula’ for converting increases in the price of individual goods and services into an overall inflation measure.

To give one example, if prices double one year and halve the next, you would expect the inflation figure over those two years to be zero.

But the way RPI is worked out means that inflation would be reported to be positive over the two years taken together.

Partly for this reason, a 2012 survey of international approaches to measuring inflation found that none of the 30 countries surveyed applied the formula used in the UK’s RPI measure.

In summary, statisticians have for some time believed that the RPI is not an accurate measure of inflation and is out of line with international good practice.

Given all of these concerns, it might be reasonable to ask why the Office for National Statistics goes on publishing the RPI at all?

The main answer is that RPI is written into many financial contracts, notably the rate of interest on government bonds, some of which were taken out many years ago in anticipation of an RPI linked rate of return.

As a result of this, ONS has continued to publish monthly RPI figures, despite being sceptical about what they show.

Eventually the ONS decided that this situation could not be allowed to continue and they took a decision that the way in which RPI is calculated would change during 2030/31.

Something called ‘RPI’ will still be published but the underlying calculations will change so that they are aligned with the calculations of CPI(H) – the Consumer Prices Index, including a measure of housing cost inflation.

This measure is thought to provide a more accurate measure of inflation than the current RPI.

The Office for Budget Responsibility has recently estimated in the long-run difference between RPI and CPI inflation that inflation on the new RPI measure (based on CPIH) will be around 0.5 per cent per year lower than on the old definition.

Once the switch has been made, there will be no separate ‘old-style’ RPI calculation, so I would expect your pension scheme to simply continue to link your annual increases to RPI, but this will now be the new – and generally expected to be slightly lower – measure.

(What happens in some pension schemes may differ, depending on the detail of their governing documents.)

In terms of what can be done about all of this, a legal challenge was launched against this decision by a group of pension schemes which are large holders of RPI-linked government bonds.

They estimated that the collective loss to schemes could be up to £100billion if the interest paid on inflation-linked government bonds was reduced as a result of the change.

However, this ‘judicial review’ was defeated in 2022 and it seems unlikely that any further change is possible.

Ask Steve Webb a pension question

Former pensions minister Steve Webb is This Is Money’s agony uncle.

He is ready to answer your questions, whether you are still saving, in the process of stopping work, or juggling your finances in retirement.

Steve left the Department for Work and Pensions after the May 2015 election. He is now a partner at actuary and consulting firm Lane Clark & Peacock.

If you would like to ask Steve a question about pensions, please email him at [email protected].

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Steve receives many questions about the state pension and ‘contracting out’. If you are writing to Steve on this topic, he responds to a typical reader question about the state pension and contracting out here

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