In March of this year, as discussed in our previous blog, the Government and UK Statistics Authority (UKSA) launched a joint consultation on UKSA's proposals to align the Retail Prices Index (RPI) measure of inflation with a variant of the Consumer Prices Index (CPI) which includes owner occupier's housing costs (CPIH). The response to the joint consultation has now been published, confirming that the proposed reform of the RPI will go ahead, but not before 2030.
UKSA aims to address the shortcomings of the RPI, which since 2013 has not been recognised as a national statistical measure because of its failure to meet internationally accepted standards, with the proposed reform. Following implementation, the RPI index values will be calculated using the same methods and data sources as are used for the CPIH. The RPI and CPIH will continue to be calculated and published as separate indices and growth rates in the Consumer Price Inflation, UK Statistical bulletin. Supplementary and lower-level indices of the RPI will be discontinued.
One of the key issues in relation to the proposed reform was timing and the March consultation sought views to inform the Chancellor's decision on whether he should consent to the change to RPI before 2030, and, if so, when between 2025 and 2030.
Concerns were raised by many respondents about the negative impact reform would have on index-linked gilts and the funding position of some defined benefit (DB) pension schemes. The Chancellor has now confirmed, that having considered the responses submitted to the consultation, in order to minimise the impact of the reform on index-linked gilt holders, he will be unable to consent to the implementation of the proposed RPI reform before 2030, when the last index-linked gilt will mature. Despite calls for further mitigation for index-linked gilt holders, it was confirmed that the Government will not offer compensation to the holders of index-linked gilts.
Post-2030, UKSA no longer require the consent of the Chancellor and will be able to legally implement the proposed reform to the RPI in February 2030 (and have indicated that they intend to do so).
As set out in the response, a number of DB pension schemes will likely see a negative impact on their funding position, although not all schemes will be affected. The direction and scale of the impact on a given DB scheme will depend on the extent to which it is hedged and the nature of its liabilities (i.e. whether the benefits to be paid out are linked to the RPI or CPI). Those schemes with high levels of CPI-linked liabilities, hedged with RPI-linked assets, are most likely to see a negative impact on their funding position.
The reform will also have a wider impact on the benefits of some individual DB pension scheme members, for example, members with a RPI-linked DB pension are likely to see a reduction in the lifetime benefits they receive - estimated by the Pensions Policy Institute (PPI) to be 4 percent for a woman and 5 percent for a man for those aged 65 in 2020. This percentage is likely to be considerably higher for those set to retire after 2030.
Although not set to be implemented for another 9 years, it is important that trustees and scheme sponsors of DB pension schemes understand the potential impact of the reform on their scheme's funding position and the extent to which members of their scheme will be affected; and begin to plan for the changes as early as possible to mitigate negative impacts.
If you would like to discuss anything raised in this blog, please get in touch with your usual contact at Brodies.