UK - Proposals to change the way one of the UK’s official inflation indicators is calculated could have huge implications for pension fund investment, the National Association of Pension Funds (NAPF) has warned.

The UK’s National Statistician is opening a consultation on a range of options for changing the way the retail prices index (RPI) is worked out, the Office for National Statistics (ONS) said yesterday.

The move was a result of work to understand why the RPI and consumer prices index (CPI) were different, it said.

The ONS said: “The differences between the RPI and CPI under consideration are those caused when different formulae are used to calculate average prices where there is no information about precise expenditure.”

This was known as the ‘formula effect gap’, it said.

Darren Philp, policy director at the NAPF, said: “A rewiring of RPI could have huge implications. Pension funds are major investors in government debt, and changes to index-linked bonds could have far-reaching impacts on those investments.”

Philp warned it could also alter the amount by which pensions being paid to former workers are increased each year.

“We will have a good look at the ONS proposals and will be sharing our views,” he said.

The four options being put forward by the National Statistician include no change, and changing the index so that it is completely aligned to the CPI.

The middle two options each involve changing a particular approach to averaging prices - the amount a price changes.

In one option, this approach could be changed for a limited number of categories - clothing, for example - and in the other it could be changed for all categories.

The first would reduce the formula effect gap, but leave some difference between the RPI and the CPI, while the second would reduce the formula effect to a minimum, according to the ONS.

The consultation document will be published on 8 October, and users of the index will be asked to say which options are the most appropriate.

The consultation will run till the end of November.

Responses will be considered by the Consumer Prices Advisory Committee (CPAC), chaired by the National Statistician, with any recommendations for change published in January 2013.

The Bank of England would also be consulted on whether any change to RPI calculation would harm the interests of bondholders, it added.

If it thought this was the case, the Chancellor of the Exchequer would then have to agree to any change before it could be made, the ONS said.

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