UK looks to bring in new inflation measure

The UK’s Office for National Statistics (ONS) intends to use a new measure of inflation in a move that could spark fresh debate about index-linked benefits.

The measure, CPIH, was first introduced by the ONS in 2010 and designed to reflect housing costs better than the existing consumer prices index (CPI).

John Pullinger, the national statistician, announced yesterday that CPIH would be the ONS’s preferred inflation measure effective from March next year.

Consultancy firm LCP said the move could open the door for the government to adopt CPIH for social security and pension benefits in the Autumn Statement, to be delivered on 23 November.

The older CPI measure of inflation forms part of the state pension’s ‘triple lock’, which ministers want reviewed.

Public sector pension benefits are linked to inflation, so any change in government policy could be applied to these pensions.

However, the effect on private sector funds is less clear.

Lynda Whitney, partner at Aon Hewitt, said the implications would depend on individual scheme rules, and trustees would have to be sure to communicate clearly any changes to members’ benefits.

The pension fund for children’s charity Barnardo’s last week lost an appeal to switch its inflation measure from the retail prices index (RPI) to CPI.

RPI is typically higher than CPI, so a switch to the latter would reduce future liabilities.

UK government index-linked bonds use RPI, but last year saw the issue of a handful of CPI-linked bonds.

No bonds have yet been issued using CPIH.

Richard Gibson, an associate at Barnett Waddingham, said: “If the government were to issue CPIH-linked debt, that would provide welcome relief to pension funds that are seeking assets that more closely match their liabilities and likely reduce buyout prices for most schemes. We hope they will put this question out to consultation in due course.”

However, Aon Hewitt’s Whitney cast doubt on the government’s appetite for such issuance.

“CPI has been around for quite some time, but there has been extreme reluctance to issue CPI-linked debt,” she said.

“Also, politically, the fact RPI is higher than CPI means the government doesn’t want to change it.”

In addition, while Whitney agreed pension funds would be likely to buy into longer-dated CPIH bonds, she questioned whether there would be sufficient demand for the short end of the yield curve.