On the go: The end may be nigh for the flawed retail price index of inflation, after the chancellor announced plans to consult on whether to align it with a version of the consumer price index between 2025 and 2030.
This intention was revealed in a letter from Sajid Javid to Sir David Norgrove, chair of the UK Statistical Authority. Sir David had recommended that the publication of the RPI be stopped and in the interim, the shortcomings of the index should be addressed by adopting the methods of the CPIH, which includes a measure of housing costs in CPI.
In a statement Sir David said: “We have been clear that the RPI is not a good measure, at times significantly overestimating inflation and at other times underestimating it, and have consistently urged all – in government and the private sector – to stop using it. However, the RPI is unique as we need consent from the chancellor to make certain changes, such as the one we have proposed.
“Although we regret that no change will occur before 2025, we welcome the chancellor’s intention to consult on resolving current issues with the RPI.”
According to the Financial Times, the Office for National Statistics’ favoured CPIH is roughly 1 percentage point lower every year than the RPI.
The change could adversely affect millions of pensioners whose pensions rise every year in line with the RPI, and conversely save defined benefit pension schemes millions.
Another factor in the equation is that reduced pension increases could be offset by the lower return on index-linked gilts, which are currently linked to RPI. Actuaries will have a field day on assessing the impact of the reforms.
End to the RPI lottery?
Commenting, Stephen Scholefield, partner, in law firm Pinsent Masons, said: “Much is made of the ‘pension increase lottery’, where RPI is hardcoded in pension scheme increase rules – meaning schemes are stuck providing an increase linked to a discredited measure, which employers are obliged to fund. Others schemes have more flexibility and have often adopted CPI, which usually gives rise to a lower increase and a lower cost for employers.”
He added: “The consultation about bringing RPI into line with CPIH would reduce the so-called lottery for pension schemes, as while RPI would continue to apply, it would be in its reformed state, which would be similar to the other widely used index, CPI.
He continued: “Pensioners may not welcome the change, but it is difficult to argue strongly in favour of a flawed calculation basis, especially if it flows though more widely in the economy at the same time.”
In 2030 the requirement for the Statistical Authority to consult the chancellor before making changes to the coverage or calculation of the RPI falls away.
The Statistical Authority states: “While the current authority board cannot commit its successors, the statistical weaknesses of the RPI make it unlikely that the authority would take a different view from our recommendations in 2030.”
