Industry divided over CPIH

The best measure of inflation has long been disputed, but it is generally agreed that the retail price index, which includes mortgage interest payments, is not the best fit because of its formula. However, some in the industry are now calling for the consumer price index, currently the government's official measure, to also be replaced.

ONS prefers CPIH

Last week, John Pullinger, national statistician and chief executive of the ONS, reiterated his earlier commitment to CPIH, saying it will be the ONS’ preferred measure of inflation from March next year.

“I believe CPIH has a number of desirable properties, most notably the inclusion of an element of owner occupiers’ housing costs. It also addresses several flaws and limitations present in alternative measures,” he said.

The ONS’ preference for CPIH throws up two questions: will the measure regain its status as a national statistic, which it lost in 2014; and if so, will CPIH be adopted by the government for pension indexation purposes, for defined benefit company schemes that do not have RPI ‘hardwired’ into their rules?

The decision to make CPIH a national statistic can only be made by the UK Statistics Authority, which in March still regarded CPIH as flawed.

UKSA did not disclose whether this would change soon, noting only: “Any decision to redesignate CPIH will be based on the degree to which the CPIH meets the standards of the Code of Practice for Official Statistics, representing the highest standards of trustworthiness, quality and value, expected by users.”

‘A long way to run’

If the government were to adopt CPIH as its official measure of inflation, it would mean the Department for Work and Pensions’ annual order – stating what inflation figure company pension funds should use for revaluation for deferred rights, and for indexation for pensions in payment – would change as well.

However, the government does not seem inclined to make any quick decisions on this issue, having changed the official inflation index less than six years ago.

Asked about a possible adoption of CPIH as the official inflation measure, a Treasury spokesperson said: “This is an ongoing process for the ONS that still has a long way to run – CPIH is not currently designated as a national statistic.”

Webb: Government should adopt CPIH

The industry is divided on whether CPIH should be used for pensions. Steve Webb, director of policy at insurer Royal London, is in favour of adopting the index.

“Now that the ONS has decided that CPIH is a better measure of inflation, the government should follow suit and use this new measure when deciding on annual increases for retired company pensioners,” he said.

He said just as the government abandoned RPI when it was decided that CPI was a better way to gauge inflation, it should now switch to CPIH.

“It would be unacceptable for the government to continue using the CPI simply because it saves money, if the statistical experts no longer believe it is the best measure of inflation,” Webb said.

Switch could add 5% to liabilities

But others in the pensions industry disagree, saying the cost of a switch would be too high for the small difference it would make.

A move to CPIH would translate into circa 5 per cent of extra liabilities for those pension schemes that currently use CPI, said Hugh Nolan, president of the Society of Pension Professionals and director at consultancy Spence & Partners.

“For schemes that are going to be 100 per cent funded, it could easily double the deficit overnight,” he said.

He pleaded for the industry to be spared the added cost as some DB schemes struggle with affordability.

“I don’t feel the industry should incur extra costs both through extra liabilities and communicating these changes to members for what’s really a small difference in the measure of inflation,” he said.

“The index is what the index is for pension increases and we should just live with that.”

Making RPI history

However, Ian Neale, director at intelligence provider Aries Insight, goes further, saying government should enable schemes whose rules refer to RPI to switch to another index. He said the government could provide either a statutory override or legislate to discontinue RPI. 

“The former is much more easily achieved, but the latter is really better in the long term,” he said.

“At a stroke, defined benefit schemes would be improved, the whole situation would be really a lot better.”