Defined Benefit  

Review of pension inflation measure delayed

Review of pension inflation measure delayed

The government’s review of how the retail prices index should be reformed has been delayed and will be presented in the March budget.

Chancellor of the exchequer Sajid Javid has written to Lord Forsyth, chair of the House of Lords economic affairs committee, explaining the government’s joint consultation on reforming the RPI would now be launched at Budget 2020 rather than this month as originally planned.

On March 11, the government will publish a consultation alongside the UK Statistics Authority proposing that the RPI should be aligned with the consumer price index including owner occupiers’ housing costs (CPIH).

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This is in response to criticism that the RPI isn’t a good measure for inflation, as it was intended to be a legacy index and was dropped as the official measure in 2010.

The Office for National statistics continues to calculate the RPI however, in order to provide a consistent historic inflation time series.

Scrapping the RPI would have consequences for pensions as it would mean that members of defined benefit schemes will receive lower pension increases.

RPI generally runs higher than CPI and is currently 2.2 per cent, compared with a CPI and CPIH of 1.5 per cent (November 2019).

Pension schemes can link increases in their employees' pensions - and therefore the employers' liabilities - to CPI, as long as their own rules don’t specifically mention RPI.

This has been the subject of several court cases recently, such as BT's or Barnardo’s, in which trustees and employers sought approval to change their inflation indexation to reduce benefit payments to members.

Tom Selby, senior analyst at AJ Bell, said: “While RPI has been widely lamented by statisticians, replacing it entirely could raise issues for people with pensions and investments specifically linked to it. 

“There are, for example, defined benefit schemes where scheme rules mandate an RPI-linked annual increase in retirement. There would also be issues for pension funds invested in index-linked gilts, which currently deliver returns based on the RPI."

He added: “If there was a flat switch from RPI to CPIH for members, the impact on schemes would likely be a drop in liability valuations and for investors there could be a hit to the returns from gilts. This is because CPI and CPIH tend to be lower than RPI.

“Investors and schemes will therefore be keen to see what transitional measures are proposed by the government. One option could be to keep a notional RPI measure running so existing contracts can be honoured.”

In its consultation the government will ask whether any reform to RPI should be made at a date other than 2030, and if so, when between 2025 and 2030.

The consultation will close on April 22, and the response will be published before the parliamentary summer recess.

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