The Lords Economic Affairs Committee has launched an inquiry into whether the retail price index (RPI) should be scrapped as a measure of inflation, a move which would make a huge dent in defined benefit scheme pensions.
In 2010 the government dropped RPI as an official inflation measure, switching to the consumer price index (CPI).
This discussion is making a comeback, with people such as the Bank of England governor Mark Carney arguing that CPI should be only one measure of inflation used by the government, which still uses RPI in some cases, such as rail fares.
There has been a long-term debate in the defined benefit (DB) pension sector about switching inflation measures, with the High Court recently denying BT’s request for this change.
DB schemes can change to the CPI, as long as its own rules don’t specifically mention RPI.
Final salary members’ benefits would decrease by £80-90bn if their pension schemes were allowed to switch from the outdated RPI, according to data from the Department for Work and Pensions (DWP).
The Lords want to find out what are the reasons to keep RPI as an inflation measure, and what impact changing it would have on the people and organisations who use it.
The committee is hearing witnesses in two hearings taking place today (12 June) at parliament, expecting to conclude the inquiry before summer recess.
Chris Giles, economics editor at FTAdviser's sister newspaper Financial Times, and Paul Johnson, director of the Institute for Fiscal Studies (IFS), will be heard at 3.35pm.
Jonathon Athow, deputy national statistician and director general for economic statistics at the Office for National Statistics (ONS), and Sir David Norgrove, chair of the UK Statistics Authority (UKSA), will give evidence at 4.35pm.
RPI rose by 3.6 per cent in the second quarter of 2017 and is expected to be hovering around the 3 per cent inflation mark by 2020, according to the Office for Budget Responsibility.
CPI inflation, in contrast, was 2.7 per cent in the second quarter of 2017 and is expected to be levelling out at the 2 per cent mark by 2020.
Pension schemes use inflation for two measurements: revaluation, the period from when the member leaves the scheme up to retirement; and indexation, which measures how much a pension goes up each year in retirement.
According to Sir Steve Webb, director of policy at Royal London and former pensions minister, there seems “little doubt that the RPI is a poor measure of inflation, and even the official statisticians accept this”.
He said: “The challenge with moving to CPI for occupational pension schemes is that it would set a dangerous precedent to break previous promises on accrued rights, by over-riding scheme rules.
“For as long as there are legal rights based on RPI, the ONS will have to go on publishing the figures, and it seems unlikely that the select committee will go as far as recommending that the series be discontinued.”
For Anne-Marie Winton, partner at ARC Pensions Law, this inquiry is needed "to help further inform the debate about the drafting lottery of how scheme’s apply inflation for revaluation and indexation purposes".