Out-Law News | 17 Jan 2019 | 4:41 pm | 3 min. read
The Economic Affairs Committee has also accused the government of "index-shopping" by continuing to use RPI when uprating student loans and rail fares despite having switched to the alternative Consumer Prices Index (CPI) measure, which is usually lower, for uprating state benefits. In a new report, it has urged the government and UKSA to decide on a single measure of inflation for uprating purposes.
Committee chair Lord Forsyth of Drumlean said that deciding on an appropriate measure of inflation was "not just a technical debate".
"The [UKSA's] error created winners and losers," he said. "For example, commuters and students pay more because rail fare increases and student loan interest rates are linked to RPI."
"The UKSA's refusal to fix the problems it admits RPI has is untenable. By continuing to publish an index which it admits is flawed, it is arguably in breach of its statutory duty to promote and safeguard official statistics. It should seek to resolve the problems with the index, consulting the Bank of England and the chancellor of the exchequer where necessary, and stop treating it as a 'legacy measure' when it remains in widespread use," he said.
The government legislated in 2010 to replace RPI with CPI as the measure of inflation for uprating benefits, tax thresholds and public sector and state pensions, as it deemed the rate "more appropriate". The committee heard that the difference between the two rates, known as the 'formula effect', widened as an unintended consequence of a routine methodological improvement by the UKSA to the collection of price quotes for clothing.
The UKSA cannot take action to address the error without the consent of the UK Treasury and the Bank of England, due to an anticipated "material detriment" on index-linked bondholders. In evidence to the committee, it said that it had not done so because it expected that the chancellor would refuse. The Treasury told the committee that it could not act as no request had been submitted by the UKSA.
The committee said that it was unclear from the relevant legislation whether the interests of those who may be affected negatively by a change to the inflation measure should be taken into account. Regardless, it said that it was unacceptable for the UKSA to be treating RPI as a 'legacy' measure of inflation, given its continued widespread use. UKSA should therefore resume its programme of periodic methodological improvements to the rate, seeking the consent of the Treasury and Bank of England to correct the error associated with clothing prices as soon as possible, it said.
The committee has also urged the government and UKSA to agree on a single measure of general inflation for uprating purposes, to include a satisfactory measure of owner-occupier housing costs. Until they have done so, the government should use the CPI measure for all its uprating calculations which are not governed by private contracts, including for new index-linked gilts. Once a single measure is agreed, the UKSA and government should decide whether RPI should continue to be published in its existing form, or whether a gradual programme of adjustments should be made until RPI can be phased out entirely and replaced by the single general measure.
Recently, the appropriateness of the various measures of inflation has been frequently debated by the pensions industry, as RPI is 'hard wired' into the scheme rules of many occupational pension schemes. Most recently, in December, the Court of Appeal found that BT was prevented by the scheme rules from switching to CPI as RPI had neither "cease[d] to be published" nor become "inappropriate". In November, the Supreme Court rejected a case brought by the trustees of the Barnardo's pension scheme, again based on the particular wording of the scheme rules.
Pensions expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com, described the Lords' report as "another interesting development in the ongoing debate about how private sector pensions should be increased".
"Those who are stuck with paying RPI may be miffed to learn that a significant part of the excess over CPI is down to the treatment of clothing, where the method for assessing price rises is thought to be erroneous," he said.
"It is surprising that the UKSA, which has the power to correct this error but only if the chancellor consents, hasn't sought to do so on the assumption that the chancellor would refuse. Whilst the correction may be detrimental to pensioners and the owners of gilts, it is difficult to see why they should carry on getting a bung at the expense of scheme employers and, in the case of gilts, the hard-pressed taxpayer. It's got to be worth the cost of a letter," he said.