Seeing eye to eye on RPI

By Joe Dabrowski, Head of DB, LGPS, and standards at the PLSA.

The use of Retail Price Index (RPI) has become a hot topic once again, after the Government announced earlier last week that it intended to consult on potential changes to the measure in January 2020. 

The decision follows a letter from UK Statistics Authority (UKSA) Chair, Sir David Norgrove, urging the Government to abolish RPI or align it with the Consumer Price Index including Housing (CPIH).

The UKSA has long called for an end to RPI, stating that it was a “poor measure of inflation” and had strong “deficiencies”. The letter comes on the back of previous independent reviews and the Bank of England Governor stating an intention to phase out RPI last year.

In its letter of response to the UKSA, the Government refused to consider ending the use of RPI, but did state that it would consider consulting on aligning RPI with CPIH. However, any proposed changes would not to come into force until after February 2025. 

The timing is important because the effects of any change will be far-reaching for pension schemes and savers – with recent reports citing long-term impacts of up to £30k for savers pension pots as a result of differences in the measure. The Government and industry will therefore need to take proper account of the potential impact on schemes, particularly in regards to the already fraught issue of indexation in pension scheme legislation, and government debt issuance (given pension schemes hold 80% of indexed linked gilts), as well the use of RPI-linked assets by pension schemes for hedging against RPI inflation.

So, whilst a tricky and contentious issue looks to have finally been put to bed, many thorny issues lie ahead.