Part 3 – RIP for RPI? Treasury and UK Statistics Authority Response

07 / 12 / 2020

Background

On 11 March 2020 the Treasury and the United Kingdom Statistics Authority (UKSA) jointly consulted on the UKSA proposal to adopt the  CPIH (consumer prices index with a housing component) method and data sources for calculating the Retail Prices Index (RPI) and the effective date for the change.

The proposal was developed in 2019 by the previous Chancellor of the Exchequer. Not only do we now have a new Chancellor, but also a radically different economic environment due to COVID.

Why is the Response joint ?

The Statistics and Registration Service Act 2007 established UKSA as an independent body with  responsibility for producing and maintaining the RPI. In certain circumstances changes to the RPI  require the Chancellor of the Exchequer’s  consent, hence the joint Consultation and joint Response.

The Response

UKSA confirms its proposal to adopt the CPIH method and data sources for RPI purposes. RPI will still be published as a separate Index. The change is intended to take effect from 2030.

Impact on pension schemes, in particular defined benefit (DB) schemes

In a nutshell:

For Members – detrimental where pension increases are linked to RPI and overtime significantly so;

For Trustees –   the impact depends on the extent to which the scheme’s pension liabilities are RPI linked and/or the scheme’s assets include index linked gilts, and any hedging in place; and  

For Employers – the scheme’s funding may be impacted and if so, the employer covenant affected.

Truly RIP for RPI ?

Looking like it albeit some observations:

(1) The Response mentions recent correspondence between the UKSA, the Bank of England and the Chancellor. The upshot is that “the Authority would [Wedlake Bell emphasis] be able to legally and practically implement” the RPI change in 2030.

WB comment: So, there is a glimmer of hope that when the time comes it could be the change will not actually happen. One week is a long time let alone 9 years – much could change in the intervening time; and

(2) The Government has declined to offer any compensation to the holders of index linked gilts, saying that index linked gilts’ contractual terms refer to the RPI and there is no change to RPI “flowing from the implementation of the Authority’s reform. “

WB comment: True RPI remains in place but from 2030 in name only as in substance the change to RPI is fundamental. To say there is no change is disingenuous but whether this gives ground for a legal challenge to the Government’s no compensation policy is another matter.

Please see the following for further background: