The plans would see the retail price index
(RPI) fall in line with the consumer price index (CPI) which is typically a lower figure, meaning that investors who had bought index-linked bonds would see the value of their investments fall.As index-linked bonds are regarded as a safe-haven, the investors the changes will hit the hardest will be those who thought they were buying a sheltered alternative to current market volatility – including pensioners.
"It’s typical for any government in desperate straits to do this sort of thing," Dampier said. "They did something similar with the war loan when they adjusted it after the fact."
"They’ll probably get away with it because most people won’t even understand it, like the pension fund raid when Gordon Brown was chancellor. Even Tony Blair didn’t understand the changes they were making then."
Dampier says the plan is terrible for savers as it will reduce the value of their investments, but it is also extremely damaging to the markets as a whole.
"If you alter the rules halfway through then you increase the uncertainty around the markets. This means people are less likely to invest," he explained.
Performance of index over 5-yrs
Source: FE Analytics
Index-linked bonds offer investors a way to hedge against inflation, and Steve Russell of the Ruffer Investment Company told FE Trustnet in July that he was building up his stock of the instruments in his fund.
According to data from FE Analytics CF Ruffer Total Return has 10 per cent in index-linked gilts. CF Ruffer European has 12 per cent in the instruments.
Performance of fund vs sector and index over 5-yrs
Source: FE Analytics
Dampier points out that the proposals will mean funds such as the Ruffer one may need to rethink their asset allocation.
Bryn Jones, manager of the Rathbone Strategic Bond fund, reduced his holdings in index-linked gilts in July.
He said: "There are four options on the table and while I think the markets have started to price in the less extreme proposals, the simple switching of RPI to CPI has not been priced in."
"It would cause all sorts of problems if they went for it – which they might do. The Bank of England would have to agree and if it didn’t the Chancellor would get involved. It would give them terrible press coverage and depending on the timetable could cause them big problems in the run-up to the next election."
Jones says he has bought back into index-linked gilts in recent weeks as the break-evens have come down.
Dampier added: "It’s just about the Government looking for a way to save money.
"I can understand why they would be doing that, but they should be looking to where they can cut money from their own expenditure rather than from people’s savings."