The UK’s Retail Price Index (RPI) inflation measure will be aligned with the Consumer Price Index including housing costs (CIPH) from 2030, with no compensation for holders of index-linked Gilts, it was announced today.
The UK government and UK Statistics Authority (UKSA) had consulted on the technical approach and when between 2025 and 2030 the RPI methodology should be reformed, and in their joint response today they said “the announcement in this response by the Chancellor and Authority Chair means the reform will not be implemented until 2030”.
According to the joint response, the Chancellor had not wanted to consent to implementation before the maturity of the final specific index-linked Gilt in 2030, in order to minimise the impact on holders of index-linked Gilts.
UK defined benefit pension funds hold around a third of their assets in these government bonds, and many schemes pay pension increases linked to RPI, which is typically 1% higher than CPIH.
The pensions industry campaigned for mitigation in the form of compensation, which the government has said it will not offer.
Jos Vermeulen, head of solution design at Insight Investment, a major manager of liability-driven investing, said it was disappointed that the government planned to go ahead with the CPIH alignment plans.
“This decision has been made despite substantial concerns being raised during the 2020 consultation, from a broad range of market participants,” he said.
“Another chapter in the RPI saga has drawn to a close, but with 10 years until the decision is implemented, we struggle to believe that this is the final chapter, and we will continue to advocate for an equitable solution.”
Insight had worked to raise awareness of the RPI reform proposal’s implications, calculating that around £100bn of value from index-linked Gilt holders would effectively be transferred to the government from its implementation.
“We will certainly continue to press our case against this deeply unfair decision”
Nigel Peaple, director of policy and research at the PLSA
The Pensions and Lifetime Savings Association (PLSA) also expressed disappointment, saying the change would reduce the value of pension schemes’ investments by an estimated £60bn and raise the risk of insolvency for sponsors as they sought to address scheme funding shortfalls.
“The PLSA has advocated for solutions which mitigate the enormous cost to schemes, employers and savers, either through one-off payments or by technical measures that better reflect the higher value under the current RPI measure,” said Nigel Peaple, director of policy and research at the industry body.
“The government says it will keep the occupational pensions sector under review. We will certainly continue to press our case against this deeply unfair decision.”
Jonathan Camfield, partner at Lane Clark & Peacock LLP, said the pension schemes that would suffer the most would be those that had invested heavily in index-linked government bonds and had their benefit increases linked to CPI.
“In these cases, the scheme suffers the loss on the asset value, but makes no corresponding gain on the liability side – increasing the deficit overall,” he said. “Those that have taken out buy-ins may be in a pretty good position as they provide a precise match for the liabilities and so avoid the risk of such step changes increasing the deficit.”
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