Calculation for yearly pension increase (FOI)

Request

Futher to the Jersey Old Aged Pensioners' pension increase of 7.26% from October 2023, which is lower than what is being  considered for States Members, please provide the following information.

A

Please explain the reasons for reporting 'RPI Pensioners', how it's calculated and why it is used for calculations regarding the yearly OAP pension increase each October?

B

Some pensioners may be spending less and hence reflecting in the 'RPI Pensioners' data but could this be related to the fact they are having less and less money to spend after paying for rent, utilities, food and so forth.

Response 

A

The main measure of inflation published by Statistics Jersey is the Retail Prices Index (RPI). The RPI provides an average measure of the change in the prices of goods and services bought by an average Jersey household. However, it is well recognised that particular types of households may experience different rates of inflation, and that summary inflation measures such as the RPI cannot meet all users’ needs. Therefore, it is necessary to produce other inflation measures, which may be more suitable for a particular purpose.

Statistics Jersey currently produce a number of these inflation measures, including the RPI-Pensioners.

The RPI Pensioners is a separate index, produced for households where the head of the household is a pensioner. These households therefore include single pensioner households as well as households where there is more than one pensioner present.

How it is calculated?

Group and Section weights are derived from information on expenditure by pensioner households gathered from the Living Costs and Household Income Survey (LCHIS). Some items are excluded from the index, for example bus fares (since pensioners are entitled to free bus passes in Jersey and therefore expenditure is negligible). 

In addition, item weights differ from those of the Jersey RPI itself, particularly in the following sections for which expenditure patterns within the section are very different for pensioners compared to all households:

• Telephone charges
• Domestic Services
• Fees and Subscriptions
• Chemist goods
  
• Personal Services
• Motor Vehicles
• Fares
• Toys, photographic and sports goods
• Books, newspapers and magazines

This is designed to reflect the different spending habits of pensioner households and provide an inflation measure that better captures these differences.

Why it is used to calculate the Social Security pension annual increase?

RPI-pensioner is a measure for inflation specifically produced for pensioner households based on what they spend their money on.  Therefore, this is the most appropriate measure of inflation to use for increasing the Social Security pension each year.

Since 2013, the Social Security pension has been uprated each year in line with a formula in the Social Security Law, which guarantees that pensions will always receive at least an RPI-pensioner increase.

In years in which prices are rising faster than wages, this protects pensioners and guarantees that the pension will rise in line with the RPI index specifically produced for pensioner costs.

In years in which wages rise faster than prices, the pension increase will be higher than the RPI pensioner increase and will look to track earnings increases in the long term, in line with the general economy.

B

In the most recent period, the main driver behind the differences between the headline RPI and the RPI Pensioner indices has been the influence of mortgage interest payments. The RPI-Pensioner index has a much lower weighting applied for these payments (as, on average, pensioners are less likely to be paying a mortgage) and therefore has not seen as much impact following the recent increases to the Bank of England base rate.