UK – Pension funds in the UK will soon be offered a new measure of inflation as a basis of indexation, following a review of the country's retail prices index (RPI).
The review, launched over the summer, concluded that the current approach to calculating RPI failed to comply with international standards.
As a result, the UK's national statistician Jil Matheson recommended that a second RPI-based index be published from March onwards, the Office of National Statistics (ONS) has announced.
The news that RPI would be retained was welcomed by the National Association of Pension Funds (NAPF) and immediately impacted the market for inflation-linked paper, as many expected Matheson to amend the index.
Paper maturing in seven months' time saw real yields fall 8 basis points from -2.839% to -2.918% between 07:00 and 08:00 GMT, immediately following the announcement, according to data from TradeWeb.
At the five-year point on the curve, linker yields fell 41bps from -1.357% to -1.764% in the space of 45 minutes.
The 10-year linker yield fell 39bps from -0.599% to -0.989% over the same period, sending the breakeven rate up from 2.62% to just shy of 3%.
Speaking prior to the announcement, Joanne Livingstone, a member of the UK's Actuarial Council and head of client services at Punter Southall, said she expected a slight change to RPI, amending the way the cost of clothes were calculated.
"It's hugely political, for starters, and it is hugely important," she said of the decision. "As a result of that, if you're the national statistician or the committee that is ruling on it, none of the options appears that attractive."
AXA Investment Managers senior portfolio manager David Dyer said his company had argued in favour of retaining the status quo, noting the number of contracts it had in place that specified RPI as an uprating measure.
Dyer said he did not expect the government to switch the index-proofing of government bonds to the new measure of RPI – named RPI Jevons (RPIJ), after its use of the British economist's approach to employing a geometric average in calculations, rather than the arithmetic average used in RPI developed by Italian economist Carli.
"It's been made clear," Dyer told IPE, "that the RPI will remain existing, and index-linked Gilts will remain linked to RPI."
JP Morgan Asset Management noted that the lack of change in bond uprating was understandable, as it would have led to a fragmented, less liquid market.
Highlighting the ONS comment that RPI "does not meet international standards", the company's Paul Sweeting, European head of strategy, speculated that this meant the measure was being "retained under duress".
NAPF chief executive Joanne Segars said she welcomed the decision to leave RPI untouched, as it would have created significant upheaval.
"The ONS is still doing work on overhauling CPI," she added, "so this was the wrong time to be reviewing RPI, and investors do not welcome the uncertainty and market disruption this announcement has created."
Zoe Lynch, partner at UK law firm Sackers, said the development of RPIJ would be watched closely, as its introduction meant there were now four measures of inflation overall, following the recent launch of an amended consumer prices index (CPI) that incorporated elements of housing costs.
"It is unclear at present what this additional index would be used for – although it would be available in future as an alternative to RPI," she said.
Hymans Robertson's Martin Potter did not expect a shift to RPIJ to occur suddenly.
This is despite an expectation that RPIJ would allow for lower inflation increases than RPI, due to its shift from the Carli to Jevons method.
"It will be many years if at all before RPIJ replaces RPI in common usage," he said.
"Specifically, it will take controversial legal change to make it the inflation standard for pensioners' incomes."