Towards a new RPI - good news or bad?
min readHidden away under the mouthwateringly large sums involved in today's comprehensive spending review is the Treasury's and UK Statistics Authority's response to the consultation on the methodology for calculating Retail Price Index (RPI). The methodology for calculating RPI will be reformed and brought into line with Consumer Price Index (CPI) including owner occupiers' housing costs - handily known as CPIH. However - this will not happen before February 2030 and there will be no compensation for index linked gilt holders.
Depending on the precise circumstances of a pension scheme (for example - is it heavily hedged in index liked gilts or not?) this could be bad news with scheme assets taking a substantial hit. Members with benefits pegged to RPI are likely to be adversely affected. For example, this may affect the level of pension increases given to pensioners in defined benefit schemes each year. On the other hand, the current RPI measure of inflation is clearly inaccurate and some re-assessment is necessary.
The government claims that the 10 year time lag will provide opportunities for gilt holders to mitigate any potential adverse effects. 2030 is some way off - who's to say the Treasury's approach won't alter once again over this period.
