Defined BenefitJun 14 2018

Fresh pension risk as stats watchdog joins call to scrap RPI

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Fresh pension risk as stats watchdog joins call to scrap RPI

The statistics regulator has said the retail price index (RPI) should be scrapped as a measure of inflation, a move which would imply a reduction in defined benefit (DB) scheme member benefits.

Sir David Norgrove, chair of the UK Statistics Authority (UKSA), said on 12 June at a hearing in parliament that he would abolish RPI if he could.

According to current legislation, only chancellor Philip Hammond has the power to scrap the metric.

He said: “I would give notice […], probably 10 years, in the expectation that over that time prices would adjust and people would be less harden by it.”

The Lords Economic Affairs Committee launched an inquiry into whether the RPI should be scrapped, hearing several witnesses on this matter.

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 and defined benefit pension schemes.

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Final salary members’ benefits would decrease by £80-90bn if their pension schemes were allowed to switch from the outdated RPI, according to data from the Department for Work and Pensions (DWP).

Jonathan Athow, deputy national statistician and director general for economic statistics at the Office for National Statistics (ONS), explained to the committee that there are “quite a fundamental set of issues with RPI,” including the way housing costs are treated, or that some household spending isn’t included in the index.

Sir David argued that the biggest issue with scrapping RPI is the index-linked gilts, with some of them still linked to the old measure of inflation.

The British government has sold bonds linked to the RPI that mature in 2068, which means that the index will probably have to be produced until then.

Sir David said that UKSA has been discussing this issue both with the Bank of England and HM Treasury.

He added: “I do feel things are beginning to moving more quickly now.”

The Lords committee is expecting to conclude the inquiry before summer recess.