UK – Proposed changes to RPI

Richard Gibson, Ian Mills |  28 November 2019

The UK Statistics Authority has proposed changing the way the Retail Prices Index (RPI) is calculated. Specifically, it has said the calculation methodology should be aligned with the Consumer Prices Index including owner occupiers’ housing costs (CPIH). As a result, this could have tumultuous implications for all UK defined benefit pension schemes.

Whilst reforming the RPI has been discussed many times before, it is looking likely the Treasury will be launching a consultation on this proposed change early in 2020 next year. This will focus on whether the change should be implemented with effect from 2025, or whether it should happen from 2030. In addition to there being uncertainty around when the change will take place, it is also unclear at this stage how different stakeholders, such as holders of index-linked gilts, will be affected. However, we would recommend pension schemes should prepare, as they could find this change significantly impacts their funding position. For some, deficits that have already been dealt with could reappear. For others, deficits could simply disappear overnight.

How your scheme might be affected, and what actions you should therefore be prepared to take, will depend on the structure of your benefits and your investment strategy, as well as whether and when these changes actually take place and how they are implemented.

This issue is complex, and will permeate many aspects of running a pension scheme. Our paper will help simplify the matter.

Key insights

  • The government will consult in January on how to align with CPIH, and when between 2025 and 2030 this change would take place
  • The new methodology would reduce RPI by around 1%. The value of RPI-linked assets could fall significantly as a result.
  • Many schemes use RPI-linked assets to hedge CPI-linked liabilities. Consequently, schemes with CPI-linked liabilities may see a significant reduction in their funding levels – possibly by 10% or more
  • How schemes with RPI-linked benefits are affected will very much depend on their hedging strategies. Those that are well-hedged may see no significant funding impact, whereas those that are less well-hedged may see improvements in their position

Our paper has been updated on 29 January 2020, per new information released by the Treasury on the 20 January 2020.

Ian Mills

Barnett Waddingham

Email: ian.mills@barnett-waddingham.co.uk
Tel:+44 (0) 333 11 11 222

Richard Gibson

Barnett Waddingham

Email: richard.gibson@barnett-waddingham.co.uk
Tel:+44 (0) 333 11 11 222