The UK’s upper house of parliament has begun an inquiry into whether the retail prices index (RPI) should be scrapped as a measure of consumer inflation, a move that the government has indicated could save employers up to £90bn (€102bn) in pension deficit contributions.
The House of Lords’ Economic Affairs Committee yesterday discussed whether RPI – which tracks the price change of a basket of items from furniture to footwear – still had relevance to measuring price movements in the UK economy.
RPI is particularly important for pension funds as the government still refers to the index to determine payments on the £400bn pile of index-linked gilts – many of which form the backbone of UK defined benefit (DB) pension portfolios.
In addition, RPI is still widely used by DB pension funds to calculate annual pension increases. According to the Department for Work and Pensions (DWP), 73% of DB schemes in the UK currently index their liabilities using RPI – despite a wholesale move to the consumer prices index (CPI) for state pension increases in 2011. The CPI figure historically has been lower than RPI.
Changes to RPI – or its abolition – could mean a major upheaval for members of existing DB schemes, said Andy Cork, partner at law firm Allen & Overy.
“Many schemes are required to use RPI as the law stands at the moment, because their rules say so – they will have some formulation that pension increases are applied in accordance to RPI and with limited flexibility to change,” Cork said.
“There would inevitably be some schemes that have that written in, and I think as part of scrapping RPI the government would have to give us greater direction [regarding] what to do with those schemes.”
In 2016, the trustees of the Barnado’s charity pension scheme failed at the UK’s Court of Appeal in their attempt to switch from RPI to CPI, with the judges ruling in favour of the existing rules and terms of the plan. Earlier this year, trustees of the Thales pension scheme failed to convince the High Court in a similar case.
The DWP further stated in March in its white paper on DB schemes that a move to CPI would slash the current £200bn aggregate DB deficit by as much as £90bn. On the flipside, the DWP noted, the move to CPI could cut annual member benefits by as much as £300 three years after the switch – or up to £12,000 over their lifetime.
Ultimately change was needed, said Anna Rogers, senior partner at ARC Pensions Law, but weighing member benefits against employer gains was politically very sensitive.
“It is a hugely controversial area,” she said, “and it also presents a big technical problem in terms of what a resolution might look like. It seems to me that we should welcome another inquiry.
“We need to keep having inquiries until someone can find a solution.”