UK government decision means there will be no change to RPI until 2030

The UK Statistics Authority (UKSA) and HM Treasury have confirmed that the Chancellor of the Exchequer, Rishi Sunak, will not consent to the UKSA making changes to the calculation methodology of the Retail Prices Index (RPI) before February 2030.

Due to well-known statistical shortcomings with the RPI, the UKSA has long intended to amend its calculation methodology to use the same data sources and methods for RPI as are used for the calculation of CPIH (which is consistent with the Consumer Prices Index but also includes owner occupiers’ housing costs). As CPIH increases are usually significantly lower than RPI over time, the planned changes, when implemented, are likely to result in a corresponding reduction to RPI-based increases to pensions. The UKSA has authority under legislation to implement these changes in 2030, but needed the consent of the Chancellor in order to make them earlier than this. Under the consultation launched in March 2020, the UKSA sought views on a proposal to implement the new methodology between 2025 to 2030.

The Chancellor has decided, however, to refuse consent for the UKSA to implement its planned changes until the final specific index-linked gilt that uses RPI matures in February 2030. This decision is designed to minimise the impact of the UKSA’s proposal on the holders of RPI-linked gilts, of which trustees of defined benefit (DB) pension schemes make up a significant proportion. It is noteworthy that out of 831 total responses to the consultation, 125 were received from DB scheme trustees who had invested in these assets.

The UKSA still intends to implement its proposals in February 2030, using the statistical method for bringing the calculation methods and data sources of CPIH into RPI that it set out in the consultation document. From this time, the Office of National Statistics (the ONS, which is a division of the UKSA) will calculate and publish the RPI based those methods and data sources. The ONS will also discontinue publishing supplementary indices based on RPI (these are indices based on the lower level item indices that are aggregated to produce the RPI).

This means that change is still coming for RPI. However, schemes will now have an additional five years to prepare (compared to the UKSA’s proposal to implement the changes from 2025). The decision also means that the impact on schemes holding index-linked gilts maturing in or before February 2030 is minimised. 

The Chancellor’s decision – and the UKSA changes planned from February 2030 – will impact DB schemes, and their sponsors, in different ways, depending on the make-up of each scheme’s liabilities and asset portfolios. In many cases this will be something of a lottery depending on whether the rules of the scheme link the benefit liabilities to RPI, or to a different index:

• For some DB schemes, the Chancellor’s decision will be welcome news. Those schemes which pay benefits linked to CPI, but which had hedged their liabilities significantly using RPI-linked assets, could have seen the total value of their assets fall while benefit liabilities remained the same. This would have given rise to increased deficits and pressure on sponsors, which would be particularly acute at this time of economic crisis. Those schemes will now need to use the time available until 2030 to adjust their investment portfolios. There had been some calls for mitigation to be provided to investors in RPI-linked assets. However, the government has confirmed that no compensation will be offered to the holders of index-linked gilts.
• The proposal could also have an impact on the funding position of the Pension Protection Fund (PPF), which has liabilities linked to CPI and also holds assets that hedge against RPI-based increases. A detrimental impact to PPF funding could potentially lead to increased levies becoming payable by DB schemes (and indirectly, by their sponsors), creating additional financial pressures.
• Some schemes, however, would be largely no worse off following the changes, if both their benefit liabilities and their asset portfolios are linked to RPI.

The Chancellor’s decision will also be welcome for individual members of DB pension schemes whose benefits are linked to RPI. It is striking that two thirds (550) of the responses to the consultation were received by members in this position. The UKSA’s consultation response cites research by the Pensions Policy Institute that 64% of DB pension schemes pay benefits linked to RPI.

However, as the consultation response makes clear, the UKSA’s proposals are only postponed to 2030 by the Chancellor’s decision. Both the “if” and the “when” now appear to be settled for the changes to RPI.

Trustees will need to consider carefully their investment portfolio relative to the scheme’s benefit liabilities in light of the proposals. They will also need to ensure that careful communications are made to scheme members to ensure they are aware of what the UKSA’s proposals will mean for them.

For members who will be affected by the changes from 2030, trustees and sponsors may come under pressure to provide additional discretionary increases to make up any shortfall.