Consultation on RPI/CPI changes delayed
Judged to be to be a "poor measure of inflation" by the UK Statistics Authority (UKSA), its view is that before the Retail Prices Index (RPI) is scrapped, it should be aligned with a variant of the Consumer Prices Index which includes owner-occupier's housing costs (CPIH).
Although the Government rejected the proposal to remove RPI, it agreed to consult on whether to align CPIH with RPI and the timing of this. It confirmed that no change will be implemented for five years (before February 2025). The Government also confirmed that its objective is for CPIH to become its headline measure over time but was silent on whether it might start to issue CPI-linked gilts.
The joint consultation between the UKSA and the Government on proposed changes to RPI and the precise timing of those changes between 2025 and 2030 has been postponed until the budget on 11 March 2020. The precise timing of the change is important to the wide range of users of RPI including employers and pension schemes.
The joint consultation will remain open for 6 weeks and the Government has said it will respond to the consultation before the parliamentary summer recess.
What's the potential impact?
Since January 2011, the gap between RPI and CPIH has been 0.9% per annum on average.
Consequently, once the change is made pension schemes that have RPI "hard-coded" in their rules can expect to pay out lower pension increases and smaller pensions to deferred members in the future. Current deferred pensioners may therefore feel the effects of the change twice.
Inflation assumptions required for a number of actuarial purposes will need to reviewed (i.e. funding, transfer values etc.).
Schemes with inflation-linked liabilities and inflation-linked assets will need to understand the potential impact of the proposed change.
The future of RPI
Even though it won't happen until 2025 at the earliest, aligning RPI with CPIH will be a major change.
Whether or not the consultation will resolve current issues with RPI remains to be seen. In the meantime, it might be more challenging than usual to set inflation assumptions until there's more clarity on RPI's future.
It also remains to be seen whether, despite the Government's wariness of removing RPI, the alignment of RPI with CPIH is the first step on the road to the formal replacement of RPI. This will be of interest to schemes and employers with rules that only permit a change to be made following the replacement of RPI.
Visit us at mayerbrown.com
Mayer Brown is a global legal services provider comprising legal practices that are separate entities (the "Mayer Brown Practices"). The Mayer Brown Practices are: Mayer Brown LLP and Mayer Brown Europe – Brussels LLP, both limited liability partnerships established in Illinois USA; Mayer Brown International LLP, a limited liability partnership incorporated in England and Wales (authorized and regulated by the Solicitors Regulation Authority and registered in England and Wales number OC 303359); Mayer Brown, a SELAS established in France; Mayer Brown JSM, a Hong Kong partnership and its associated entities in Asia; and Tauil & Chequer Advogados, a Brazilian law partnership with which Mayer Brown is associated. "Mayer Brown" and the Mayer Brown logo are the trademarks of the Mayer Brown Practices in their respective jurisdictions.
© Copyright 2019. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.