UK publishes RPI reform consultation as part of Budget

The UK government and the UK Statistics Authority (UKSA) have published a keenly awaited consultation on the reform of the retail price index (RPI) methodology in connection with today’s Budget.

The consultation follows an initial proposal by UKSA presented last March to address the shortcomings of the RPI measure of inflation by aligning its calculation with that of the consumer price index (CPI) including housing costs.

The consultation covers the issue of timing, including whether the UKSA’s proposal could be implemented at a date other than 2030, and if so, when between 2025 and 2030 and issues on technical matters concerning implementation of the proposal.

Hemal Popat, principal at Mercer, said the consultation had been broadened to investigate the wider impacts of RPI reform, which was positive.

Laura McLaren, partner at Hymans Robertson, said: “Some pension scheme sponsors that have been stuck with RPI as a measure of inflation through the so-called ‘Rules lottery’ might welcome finally being able to follow suit with those schemes that have already been allowed to change benefits to be linked to CPI.”

She noted, however, that there is likely to be lots of lobbying from groups that could lose out.

“Those investors in RPI-linked assets, such as index-linked gilts, could see this as yet more bad news amidst this week’s market turmoil,” she said.

“Certainly many were watching closely for some mention of compensating asset holders for lower expected returns; the consultation was notably silent on this,” she added.

Unless this changes, McLaren said, pension schemes hedging CPI-linked liabilities with RPI-linked assets, and individuals with RPI-linked pension benefits – who stand to see aggregate lifetime pension payments reduce by between 10-20% – are likely to be amongst the biggest losers.

She added: “Whilst the publication of the consultation is a helpful step forward, many will still be left scratching their heads at exactly how all of this will play out in practice. The detail is unlikely to be known for some time.”

The consultation will be open for a period of six weeks, closing on 22 April. The government and UKSA will respond to the consultation before the parliamentary summer recess.