4 September 2019
Following announcements from the Government and UK Statistics Authority about the future of the RPI inflation measure, Alex Waite, Partner at LCP, commented:
“In contrast to what many had been predicting, and perhaps what has been embedded in the gilt markets, the Government has decided that the formulae within RPI could potentially be replaced by that within the CPIH from a date between 2025 and 2030. Assuming the change is made, this would materially reduce the value of RPI from a future date. On the back of the announcement, we have already seen an immediate impact on the price of longer-term gilts with some falling in price by over 5%. For many pension schemes we expect immediate impacts on the funding, accounting and buyout position, and some of these could be material.
“We also expect there to be falls in market expectations for RPI and the ‘wedge’ between RPI and CPI, which are important assumptions for the valuation of many pension schemes. Arguably this announcement reduces the attractiveness of exploring a change from RPI to CPI pension increases, as broadly speaking the impact would only be of benefit for 5 to 10 years assuming that the change to the RPI formula is made.”