RPI reform – nobody needs to lose out
As an investment manager we feel we have a responsibility to seek your support on an issue that we believe may adversely affect both asset owners, such as pension funds, insurers, and millions of pensioners in the UK. The issue: the proposal to reform the Retail Prices Index (RPI) to align with the Consumer Prices Index including owner occupiers’ housing costs (CPIH).
Timeline for RPI reform
- An investigation into a divergence between RPI and the Harmonised Index of Consumer Prices (HICP), a measure of UK inflation created in 1996 by the European Union was announced in 2011 by the National Statistician’s Consumer Prices Advisory Committee (CPAC). This was finalised in 2012. This investigation highlighted a problem stemming from a change made in 2010 to the way the Office for National Statistics (ONS) collected clothing prices. It concluded that the use of the Carli formula in certain subcomponents of RPI created an upward bias in the index. This impact has become known as the ‘formula effect’.
- With the calculation of RPI in question, Dame Jil Matheson, the UK National Statistician, announced a consultation on options for improving RPI1, which launched on 8 October 2012. The consultation was conducted over eight weeks, and 332 of the 406 respondents supported keeping the calculation of RPI unchanged.
- In February 2013, the ONS published a response to the consultation2, in which it concluded that RPI did not meet international standards. The ONS announced that a new index would be published from March 2013, using the Jevons formula and known as RPIJ. RPI would continue to be published, but no longer be classified as a national statistic. Despite this, RPI continued to be widely used by both the government and private sector.
- In May 2013, Sir Andrew Dilnot, Chair of the UK Statistics Authority, invited Paul Johnson, Director of the Institute for Fiscal Studies, to conduct a review of UK price indices.
- In January 20153, the Johnson Report was published, concluding that RPI should remain as a legacy index.
- In June 2018, the House of Lords Economic Affairs Select Committee launched an inquiry into the use of RPI4, including a consultation in which Insight participated.
- In September 2019, Her Majesty’s Treasury released a letter from the Chancellor of the Exchequer, Sajid Javid, on proposed reforms of RPI, which suggested that RPI could be replaced by CPIH between 2025 and 2030.
The consultation opened on 11 March 2020 focusing on:
a) whether a change to RPI be made before 2030, and if so, on what date between Feb 2025 and 2030
b) technical issues concerning proposed alignment of RPI with CPIH
- Response from government scheduled for later in 2020
- February 2025: Earliest date that changes can be made to RPI based on Chancellor’s letter
- Chancellor’s consent is no longer needed for the UKSA to change RPI calculation after 2030 due to differing prospectus language for index linked gilts maturing beyond this date
If RPI is simply aligned with CPIH then, all else being equal, we believe that this would reduce the pension fund benefits received by millions of people in this country and may result in a transfer of wealth from index-linked gilt holders to the UK government of c.£100bn.
It does not have to happen this way.
A fair and equitable outcome can be achieved for everyone if RPI is aligned with CPIH plus an appropriate margin to ensure that there are no resultant losers.
The Government launched a consultation on the alignment of RPI with CPIH on 11 March 2020.
We urge all UK pension funds, insurers, advisers and asset managers to engage with policymakers now to shape the upcoming consultation and to participate, once published, to ensure that it:
- provides an opportunity for all the relevant stakeholders to debate whether the change should proceed; and
- encourages debate on equitable solutions for holders of contractual RPI-linked payments, such as pension fund members and index-linked investors, to achieve an outcome which avoids an unintentional wealth transfer.
With your help, we can protect asset values and the retirement income that millions of people depend on now and for decades to come.