Following the call by the governor of the Bank of England to abandon the Retail Price Index as a way to measure of inflation, two former pensions ministers have come out in agreement. Both Sir Steve Webb and Baroness Ros Altmann have said that the Retail Price Index is unreliable and that it should be replaced with the Consumer Price Index (CPI) on new index-linked bonds.
Former pensions minister in the coalition government, Sir Steve Webb said:
"RPI is a discredited measure of inflation and there must come a point when the government cannot go on using it for stuff that saves it money, like student debt and train fares, but use CPI for social security benefits and public sector pensions."
"At the very least there should be CPI gilts, and then you can gradually transition from one to the other. Savers may disagree. They do well from the old RPI measure, which is typically around 0.7 percentage points higher than CPI, giving them extra income on the index-linked bonds. But it is bad for rail travellers and those with student debts, whose inflation-linked costs rise more quickly than they should."
Baroness Ros Altmann, also a former pensions minister, said it is "a sensible idea" as RPI is "odd and anachronistic". She said it could also help those final salary schemes which are struggling to finance themselves, by reducing their liabilities.
"There are some pension schemes which are struggling with deficits. One of the easier ways of making benefits more affordable without jeopardising the employer and still protecting members to a large degree could be to have an official statutory override. So if you want to change from RPI to CPI, you can. At the moment there is no legal mechanism to do that unless the company is about to fail."
Mr Carney, governor of the Bank of England said the UK "wouldn't want to be in the same position 10 years from now" using an inflation measure with "known errors" to uprate government bonds, student loan contracts and rail fares.