Investment advisor and fiduciary manager Cardano believes that last week's Consumer Prices Advisory Committee (CPAC) meeting has created further uncertainty about how RPI inflation will be calculated in future.

Phil Page, client director of Cardano, said: "This issue has potentially massive implications for pensioners, trustees, sponsors and all holders of assets linked to RPI. The market was hoping that CPAC would give a clear steer on how RPI will be calculated in future. Instead, they've proposed an industry consultation based around four options.

"At one extreme, there could be no change to the way that RPI is calculated in future and at the other extreme we could see a fall of 1% per annum in the future rate of RPI compared to the current calculation approach. A 1% per annum reduction would lead to a huge fall in pensions for people who receive a pension linked to RPI, which is most of us. At the same time though, it would improve funding deficits in the UK dramatically."

CPAC's four options for the way that RPI is calculated in future are:

-  No change

-  Change the RPI calculation methodology for clothing prices only, which would probably reduce RPI by around 0.3% per annum in future

-  Change the RPI calculation methodology for all types of goods and services, which would probably lead to a fall of nearly 1% per annum

-  Move to calculating RPI and Consumer Price Indexation (CPI) in the same way, reducing future RPI by around 1% per annum

Page said: "Pension funds, pensioner groups, sponsoring employers and holders of RPI linked assets should certainly contribute to the consultation and make their views known, given the potentially massive implications.  The consultation on these option starts on 8 October and is expected to run until the end of November."

First published 19.09.2012

azeevalkink@wilmington.co.uk