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Is it RIP for RPI in the UK? Not Quite Yet…

The Retail Prices Index (RPI) and the Consumer Prices Index (CPI) are both indices that give a rate of inflation based on the prices of certain goods. However, they are calculated differently and economists generally agree that CPI is a more accurate measure of inflation. In 1996, the Office for National Statistics removed RPI’s status as an official national statistic in the UK and in 2010 the incoming chancellor George Osborne announced that CPI was to be more widely adopted, including for setting benefits and pensions.

RPI generally runs at about 1% higher than CPI and is currently 2.8% vs CPI at 1.9%. As a result, when RPI is used as a measure of inflation instead of CPI, it can be either positive or negative depending upon what it is being applied to.

Despite the fact that RPI is no longer the official UK inflation measure, RPI is still used widely by the UK government, for example to set annual increases in rail fares and student loan repayments. This means that commuters and students face higher increases than if CPI was used. However, more than a quarter of inflation linked British government bonds worth around £450 billion are linked to RPI resulting in investors receiving an estimated windfall of £1 billion a year.

CPI rather than RPI is used to calculate increases in UK state pension payments and public sector pension benefits meaning that since 2010 they have received lower annual increases. This use of RPI by the UK government for some revenue raising activities and CPI for some benefit payments has resulted in accusations of the government “inflation shopping”.

Many UK private sector final salary schemes also continue to increase annual pensions by RPI (typically up to a cap of 5% p.a.), as their scheme rules have RPI “hard-wired” into them so that they are unable to change to CPI without changing the scheme rules. This has resulted in several recent court cases where trustees and employers have sought to change the inflation indexation to reduce benefit payments to members.

Changing the way RPI is calculated may not be welcomed by members of UK final salary pensions who currently receive annual increases based upon a higher rate of inflation. However, with different measures of inflation being used across pension schemes it continues to put pension trustees in a difficult position.

Paul Johnson, the director of the Institute for Fiscal Studies notes that this is “one of the reasons that we’ve shut down occupational pension schemes, because loads of them are locked into increasing pension in line with the RPI, which is incredibly expensive, and is effectively paid for by current workers.”

In January 2019, a report from a House of Lords committee recommended the use of a single inflation measure. The UK Statistics Authority also issued proposals in March including that the publication of RPI cease and that RPI should be aligned with CPI before 2025. The Bank of England responded on 4 March to confirm changes proposed were material and detrimental to holders of relevant gilts.

Following the appointment of a new Chancellor, Sir David Norgrove wrote to Sajid Javid MP in July 2019, highlighting the importance of the issue and the need for a resolution. In response, the Chancellor, confirmed in September 2019 that the UK government will not introduce proposed changes before 2025 due to “potential disruption for users of a change to RPI and the government’s focus on Brexit”. Instead, the government will launch a consultation in January 2020 to ask whether a change should be made at a date other than 2030 and, if so, when between 2025 and 2030. Sir David Norgrove, chairman of the UK Statistics Authority noted that “although we regret that no change will occur before 2025, we welcome the chancellor’s intention to consult on resolving current issues with the RPI”.