The Office for National Statistics (ONS) has launched a public consultation on changes to the calculation of the retail prices index (RPI) that would make it more in line with the consumer prices index (CPI).

The ONS is considering alterations to its RPI formula which would reduce the gap with CPI. Currently RPI runs typically 0.5-1% higher than CPI.

Aligning the indexes CPI could save the Chancellor £3bn a year in debt interest payments, but Osborne would risks alienating bondholders as RPI is used to calculate returns on index-linked gilts.

Experts in the pensions industry, such as the National Association of Pension Funds (NAPF), have voiced their concerns that this could affect private sector pensions in the long run.

The NAPF's director of policy, Darren Philp said: "Changing the way RPI is calculated could have far-reaching consequences for both pension funds and pensioners.

"Pension funds are big investors in government debt so any changes to index-linked bonds could have major impacts on those investments. A shift in RPI could also affect the amount by which the pensions being paid to retired workers go up each year, and change the overall funding position of the pension scheme.

"The ONS has set out a few different routes and we will consider their wider implications for the pensions landscape."

Former chief executive of the Pensions Advisory Service (TPAS), Malcolm McLean, OBE, who is now a consult at Barnett Waddingham said: "This constant moving of the goal posts illustrates the difficulty scheme sponsors have in budgeting and cost control and for members in making their retirement plans with any degree of certainty as to their likely levels of pension income. It also begs the question; if the outcome of this proposal brings the RPI and CPI broadly in line with each other, what will be the point of having two separate indices going forwards?"

First published 09.10.2012

azeevalkink@wilmington.co.uk