12: RPI reform consultation delayed until March 2020

The government has confirmed a six-week consultation on changing the Retail Prices Index (RPI) to align it with Consumer Price Inflation, including owner occupiers’ housing costs (CPIH) as a measure of inflation. This will begin on 11 March 2020 (the date of the budget).

CPIH is generally around 1% lower than RPI and as the proposal is to change RPI itself, it could have a direct and significant long-term impact on funding and accounting for pension schemes with benefits linked to RPI. The extent of the impact will depend on whether scheme benefits are linked to inflation and how much inflation hedging is used in the scheme’s investment strategy.

In September 2019 the UK Statistics Authority (UKSA) confirmed that it intends to align RPI with CPIH. However, until 2030, the consent of the Chancellor of the Exchequer is required for any change not least because RPI is used as the reference index for some government debt. The change could have an adverse effect on holders of that debt which could in turn result in a call for compensation from the government for those affected. The Chancellor has already announced that he is unable to consent to the change to RPI before 2025 because users of RPI will need substantial time to prepare.

The government and UKSA’s joint consultation will consider the detailed methodology; the potential effects of moving to CPIH; and whether the change should happen before 2030, and if so, at what date between 2025 and 2030. Responses to consultation must be submitted by 22 April 2020 and the government and UKSA will then publish their response before the Parliamentary summer recess.

Despite the long lead in to the change, trustees and employers are advised to begin considering what preparations are needed and to factor the change into their current decision-making.

For schemes that have benefits linked to RPI in calculating revaluation and increases on pensions in payment, the change will necessarily have an impact on the value of member benefits. Trustees may wish to consider with their actuary whether, and when, any action is needed in respect of benefit calculations, for example the inflation assumptions used in transfer value calculations. Other areas for pension schemes which may be affected include investment and funding strategies, deficit funding, buy-ins and buyouts and liability management.

The precise effects of the change will vary considerably depending on a scheme’s structure, trust deed and rules, and hedging and investment strategies. For example, schemes with RPI hedging against RPI-linked benefits are likely to successfully match RPI liability movements, whereas schemes with RPI hedging against CPI-linked benefits are at risk of a funding loss.

However, Trustees and employers should therefore take detailed specialist advice to ensure they understand the potential impact on their scheme’s funding and the timescale for any actions needed. In due course, it may be necessary to consider whether amendments to scheme rules are required to remove references to RPI and to reflect the effect on individual benefits.