CPI and RPI gap at largest for five years as schemes eye law change

Research by law firm Squire Patton Boggs highlighted the gulf between RPI, which hit 1.9 per cent during the 12 months to July, and the newer CPI measure, which stood at 0.6 per cent. RPI is still used by 70-80 per cent of schemes

The gap between the two figures is the biggest since CPI became the legislative basis for determining pensions benefit increases and revaluations.

A widening of the gap between the two figures means the liabilities of schemes using RPI grow faster than those of their CPI peers. Pension funds are only required by law to provide benefit increases in line with CPI, but the wording of many schemes’ rules prevent them from switching. 

Clearly the world changes, but there’s so little confidence and trust in pensions

Steve Webb, Royal London

The findings coincide with an impending UK Statistics Authority review on the future of RPI, and whether CPIH, which includes consideration of housing costs, should replace CPI as the headline measure of inflation.

It was also suggested in the Department for Work and Pensions’ consultation on the British Steel Pension Scheme that a change of indexation could mean the scheme would avoid the Pension Protection Fund. Responses to the consultation are still being analysed.

“It’s a real mixed bag in terms of when RPI applied and when CPI applied,” said Matthew Giles, partner at Squire Patton Boggs. “Whilst the gap between the two was relatively small it was a frustration, but it was probably bearable because it was typically around half a percentage point.”

He added: “It’s now grown to 1.3 per cent, which is the biggest since [RPI was scrapped] and as a result it will have a significant impact on the cost of providing those benefits.”

Many employers and trustees are waiting for the outcome of an appeal of last year’s Buckinghamshire v Barnardo’s court case, according to Giles. He said the appeal could be decided this autumn.

The charity had attempted to change indexation to CPI, based on the wording of their scheme rules: “[Index] shall mean the Government’s Index of Retail Prices or any other official cost of living index published by authority in place of or in substitution for that Index”.

Mr Justice Warren originally ruled that because CPI was not an official measure when the rules were written, and because RPI is still published by the Office for National Statistics, Barnardo’s and its trustees should not be allowed to switch.

Changing the law

If the appeal is unsuccessful, schemes struggling to pay benefit increases in line with RPI will look to government and legislative change to ease the strain.

Helen Forrest Hall, defined policy lead at the Pensions and Lifetime Savings Association, said the ONS was right to abandon RPI, which she said was “based on an inferior methodology”, at the end of last year

“However, we stressed that such a move needed to come with parallel commitments to modernise both the legislation governing pension scheme indexation and government debt issuance, in a managed fashion,” she said.

“This cannot occur in isolation from other areas of government policy as the RPI legacy has a number of consequences for pension schemes.”

The distinction between schemes that are allowed to use CPI and those that are not may not be an arbitrary one in all cases, said Steve Webb, director of pensions policy at Royal London.

The former pensions minister said that in the case of many ex-public sector schemes like British Steel, the RPI measure would have been an assurance to trade unions that members’ benefits were safe, and as such should not be tossed aside lightly.

“Starting from a blank sheet of paper, I don’t suppose anybody would put RPI in their rules these days – but it was a promise, it was in the rules,” he said. “Clearly the world changes, but there’s so little confidence and trust in pensions.”

He questioned the assumption that pension obligations under RPI were putting excessive strain on Britain’s economic recovery, and pointed to Lane Clark Peacock research showing that many companies operating poorly funded schemes still pay large dividends.

Webb also argued that he was yet to see “hard evidence” that the gap between the two measures would remain as wide, and pointed out that on rare occasions RPI has even dropped below CPI.

Instead he expected legislative reform to look at the role of the Pensions Regulator amongst other things, but added that indexation changes should not be ruled out entirely: “If it persists then clearly it’s enough to be significant.”