How much to live on

blue.peter

Sterlingtimes said:

Now the government can fiddle the indices as it wishes to reduce its commitment and hence the value of the annuity. This does not feel correct. Of course, when inflation is high the new "RPI-minus" still has to be capped at 5%.

It's not "fiddling the indices", since they're calculated independently by the ONS. All they're planning to do is change the index that's used, from one ONS index to another. The question is whether they've gone through the correct process in determining whether and how to make that change. This is what the judicial review mentioned above is intended to determine. If the JR succeeds - and I certainly hope that it does - the government has to go back to square one. They might or might not make the same decision the second time around, but would have to reach the decision by a fairer process.

The problem is that the ONS has been saying for years that RPI is flawed, and they want to dump it. It seems pretty clear that the government has now decided to go along with them. The real question is what index should be used in its place. CPI? CPIH? Something else?

As for the capping, that's down to the scheme. The legislation permits schemes to apply that cap, but doesn't require them to do so. LPI is the minimum that schemes must apply, not the maximum. Of course, most schemes do impose the cap because the employers don't want to fund the potentially unlimited liability of uncapped pensions.

What seems a bit unfair to me is that dumping RPI looks likely to give a windfall profit to index-linked annuity insurers at the expense of their annuitants. You'll hear claims that it doesn't because their IL annuities are backed by IL gilts (as you appear to assume is the case for your annuity). That's not entirely true. Whilst annuity rates are typically calculated by reference to gilt yields, insurers are under no obligation to use gilts to support their annuities, and other investments (e.g., corporate bonds and equities) are often used.

Pensions_matter_2

Thats good news about the judicial review. I responded to the govt consultation on the changes as it completely glossed over (if that) the impact on RPI annuity holders or indeed those purchasing such an annuity in the run up to the change who might have no idea it was coming. The govt response to the consultation did not even mention the issue, focussing on schemes (which have more clout of course) and ignoring individual annuitants. It felt very wrong and I agree could represent a windfall to annuity providers. What obligation would they have to alert existing and prospective annuity purchasers of this change and when?  I hope the review considers all of this and the issue of fairness.

Pensions_matter_2

By implication, if the review concludes it is unfair to schemes which have secured their liabilities based on RPI, presumably it will be unfair for RPI annuitants to have to bear the potential loss in income which the new basis might cause. 

Sterlingtimes

blue.peter said:

Sterlingtimes said:

Now the government can fiddle the indices as it wishes to reduce its commitment and hence the value of the annuity. This does not feel correct. Of course, when inflation is high the new "RPI-minus" still has to be capped at 5%.

It's not "fiddling the indices", since they're calculated independently by the ONS. All they're planning to do is change the index that's used, from one ONS index to another. The question is whether they've gone through the correct process in determining whether and how to make that change. This is what the judicial review mentioned above is intended to determine. If the JR succeeds - and I certainly hope that it does - the government has to go back to square one. They might or might not make the same decision the second time around, but would have to reach the decision by a fairer process.

Thank you. Upon investigation, I was surprised to discover that the ONS is an effective function of Parliament rather than Government. Hence, there is a separation of powers. Nonetheless, is the ONS intending to replace RPI with a system that could deliver an inflation figure greater than the current RPI or will it always be less? Where the inflation figure turns out to be less than the current RPI then the ONS is pushing against an open door in so far as Government and Parliament stand. Now, what is a judicial review doing examing the ONS which reports to Parliament?

blue.peter

Sterlingtimes said:

Nonetheless, is the ONS intending to replace RPI with a system that could deliver an inflation figure greater than the current RPI or will it always be less?

Ah, now that's one I can't answer.

If you look at the table in the article to which I referred yesterday evening, you'll see that CPIH has, historically, always(?) lagged about 0.5% to 1% p.a. behind RPI. The 2.5% difference for November 2021 is pretty extreme.

You'd need a statistician to tell you whether it's possible that CPIH could ever give a higher figure than RPI. I'm sorry, but I am not that person by any stretch of the imagination. I suspect that the answer is "no", but am not certain.

I like RPI because (a) I've always known it, and (b) I think I understand it. It makes sense to me. As for CPI and CPIH, all I know is that the methodology is different. I'm aware that they use a geometric mean rather than an arithmetic mean, but there might well be other differences. Why they should be more meaningful, I don't know. What does seem pretty clear is that if the change from RPI to CPIH goes ahead, those of us with RPI-linked income will lose out over the long term. Remember that any reduction in the rate will compound.

Time4T_Accounts

This article from ONS gives a good explanation of the fundamental flaws in the calculation of RPI, and why it is no longer considered fit for purpose as a National Statistic.

https://www.ons.gov.uk/economy/inflationandpriceindices/articles/shortcomingsoftheretailpricesindexasameasureofinflation/2018-03-08

Importantly, it shows that RPI can underestimate inflation as well as overestimate it.

Merry Christmas, all !

Sterlingtimes

blue.peter said:

What does seem pretty clear is that if the change from RPI to CPIH goes ahead, those of us with RPI-linked income will lose out over the long term. Remember that any reduction in the rate will compound.

This goes back to the crux of the matter in the original headline, "How much to live on". RPI may give a little headroom having regard for compounding perhaps for as much as thirty years. Pensioners with CPIH capped at 5% are more exposed than those on CPI uncapped. 

Sterlingtimes

Steve_PL_too said:

Importantly, it shows that RPI can underestimate inflation as well as overestimate it.

Thank you for referencing an interesting take on the situation. 

hugheskevi

At Christmas, it is important to focus on the important things in life. Which means measuring just how plush your Christmas food is compared to the Jones'!

The Pension and Lifetime Savings Association have published a detailed breakdown of the cost of Christmas Fare, broken down into:

• "Minimum" - £9.05 per head and no smoked salmon for you
• "Moderate" - £25.33 per head, with sliced bread and don't expect any cheddar or stilton
• "Comfortable" - £33.77 per head, with Bailey's, beer, wine and prosecco
  

Which can be seen in the table halfway down this page (note the tabs to toggle between the options).

Or, for those of an ethical persuasion, you could go for a vegan Christmas Box at between £20-30 per head (although it has a lot less contents than the PLSA baskets so isn't comparable).

Sterlingtimes

I am definitely in the unethical category above.

Even Hargreave Lansdown sends out tedious emails telling me how I must invest ethically. The last time I took its advice, I committed funds to Woodford. Who is Hargreave Lansdown to give us lessons in ethics?