Statisticians query CPI 'star billing' ahead of pensions link

Leading UK statisticians are questioning government plans to link the state pension and other key benefits to the consumer prices index (CPI).

In a letter to the chair of the UK Statistics Authority, David Hand, president of the Royal Statistical Society (RSS), says CPI does not merit "sole star billing" and argues pensions linked to the retail prices index (RPI) are likely to perform better.

As part of plans to cut £40bn from public spending, the coalition government says from April next year, pension payouts and other benefits would rise in line with CPI instead of RPI.

In his letter, Hand writes both indices "have drawbacks", but stresses the RSS has concerns over "the way in which CPI has over the years gained increasing prominence in ONS material, and is now the headline index even though it is not necessarily the best index for all purposes".

Hand warns giving prominence to CPI ahead of other indices means users are "implicitly encouraged to use it for purposes, such as wage negotiations, for which it is not ideal".

A pensioner whose pension is specifically linked to RPI will be noticeably better off after a few years than one whose pension is linked to CPI, he adds.

Several challenges to the Chancellor's decision have been raised since the emergency Budget. Lawyers at Macfarlanes claim the switch to CPI may give some pension scheme members the grounds to mount a legal challenge to the government.

Standard Life's senior pensions policy manager Andy Tully claims the switch could hit scheme members who claim their pensions many years after leaving their company, reducing benefits by up to 25%.