RPI To CPIH

Consultation on RPI/CPI changes delayed

Judged to be to be a "poor measure of inflation" by the UK Statistics Authority (UKSA), its view is that before the Retail Prices Index (RPI) is scrapped, it should be aligned with a variant of the Consumer Prices Index which includes owner-occupier's housing costs (CPIH).

Although the Government rejected the proposal to remove RPI, it agreed to consult on whether to align CPIH with RPI and the timing of this.   It confirmed that no change will be implemented for five years (before February 2025).   The Government also confirmed that its objective is for CPIH to become its headline measure over time but was silent on whether it might start to issue CPI-linked gilts.

The joint consultation between the UKSA and the Government on proposed changes to RPI and the precise timing of those changes between 2025 and 2030 has been postponed until the budget on 11 March 2020. The precise timing of the change is important to the wide range of users of RPI including employers and pension schemes.

The joint consultation will remain open for 6 weeks and the Government has said it will respond to the consultation before the parliamentary summer recess.

What's the potential impact?

Since January 2011, the gap between RPI and CPIH has been 0.9% per annum on average.

Consequently, once the change is made pension schemes that have RPI "hard-coded" in their rules can expect to pay out lower pension increases and smaller pensions to deferred members in the future. Current deferred pensioners may therefore feel the effects of the change twice.

Inflation assumptions required for a number of actuarial purposes will need to reviewed (i.e. funding, transfer values etc.).

Schemes with inflation-linked liabilities and inflation-linked assets will need to understand the potential impact of the proposed change.

The future of RPI

Even though it won't happen until 2025 at the earliest, aligning RPI with CPIH will be a major change.

Whether or not the consultation will resolve current issues with RPI remains to be seen. In the meantime, it might be more challenging than usual to set inflation assumptions until there's more clarity on RPI's future.

It also remains to be seen whether, despite the Government's wariness of removing RPI, the alignment of RPI with CPIH is the first step on the road to the formal replacement of RPI.   This will be of interest to schemes and employers with rules that only permit a change to be made following the replacement of RPI.

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