Retail price index to be reformed by 2030, UK government confirms

Out-Law News | 26 Nov 2020 | 10:09 am | 1 min. read

The UK government has announced that the retail price index (RPI) is to be reformed and aligned with the housing cost-based version of the Consumer Prices Index (CPIH) by 2030.

The planned reform will not take effect until 2030 in order to minimise the impact of the proposal on the holders of index-linked gilts, which include many pension funds. Chancellor Rishi Sunak recently told UK Statistics Authority (UKSA) chair Sir David Norgrove that he would not be able to give the required consent to the proposal before the maturity of the final specific index-linked gilt in 2030.

The change means that from the date the reform is implemented CPIH will be used where RPI is prescribed, for instance in a pension scheme’s documentation.

The UKSA said the reform was necessary (60 page / 858KB PDF) as RPI had at times greatly overestimated, and at other times underestimated, the rate of inflation. When CPIH methods and data sources are implemented into RPI, the two indices will continue to be calculated separately on an ongoing basis and published as separate indices. However, the UKSA will discontinue supplementary and lower level indices of the RPI at this point, and guide users on how to move away from the use of RPI-related indices.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law, said pension schemes would be impacted by the change.

“Many pension schemes have RPI hard coded in their rules and, despite views that it is not a good measure of inflation, have been stuck with it. Today’s announcement will reduce liabilities for some schemes but reduce asset values for others,” Tyler said.

In August, the Pension Protection Fund (PPF)’s consultation response (10 page / 248KB PDF) said it largely used the RPI-Linked Gilt and RPI derivative markets to hedge its liabilities against inflation risk. As a result, the planned reform would produce a negative balance sheet impact of £1 billion if implemented in 2030.

“This alone may impact defined benefit schemes by leading to an increase in PPF levies,” Tyler said.

The PPF also warned of the potential for disruption in the gilts market arising from protracted legal challenges to the decision and schemes having to change their hedging strategies.

Tyler said it was unclear when pension schemes providing RPI-linked indexation would be able to reflect the change in valuations and funding plans, and until then, employers would need to continue paying contributions on the existing basis. Meanwhile, trustees should monitor developments and be aware the reform could already have an impact on fund valuations and investment strategy.