It’s RPI again (with apologies to the Housemartins)

Helen Powell

It’s happy hour again* at the Office for National Statistics, with a four for two deal on inflation measures. It’s no longer just RPI and CPI: will the new choices reopen debate on how to revalue pension benefits and index pensions in payment?

If you wanted to pick just one, starting from a blank piece of paper, your options would be:

–  RPI – the traditional retail prices index

–  RPIJ – new and improved RPI, which is calculated based on the same basket of goods as RPI but using a different formula

–  CPI – the consumer prices index, now used as the measure for statutory minimum revaluation and indexation of pensions in payment

–  CPIH – this is CPI with added OOH: it is calculated in a similar way to the consumer prices index but incorporates owner-occupiers’ housing costs.

The issue for schemes and their sponsors is, of course, that they are not starting from a blank piece of paper. The question of whether scheme rules and promises made to members allowed a move from RPI to CPI, in line with the Government’s changes to the statutory minimum requirements, has been a hot topic in the last two years. We’re currently seeing a steady trickle of Pensions Ombudsman decisions on complaints from disgruntled members of schemes which have moved to CPI uprating. It’s worth noting that all the complaints so far have been unsuccessful. It’s difficult for members to establish that they made decisions about pension saving in reliance on general statements in member booklets and letters (which may have been correct at the time) about pensions being increased in line with RPI.

The ONS may now have brought the issue back to life, with a surprise announcement that it has demoted RPI from having the status of a national statistic, though it will continue to publish it month by month. It has also published a report which includes its estimate that RPIJ would have been on average 0.4% lower than RPI over the last ten years (and more like 0.6-0.7% since 2010 due to earlier changes in the method of calculation).

For sponsors of schemes where a link to RPI for revaluation and indexation has been maintained, the question must therefore be whether a move to RPIJ would be a possibility. Some commentators have suggested this could reduce scheme liabilities by up to 10%. Depending on the wording of the scheme rules, will we now see schemes reconsidering – yet again – their choice of reference index, given the introduction of an amended (and improved) RPI measure?

One issue to bear in mind is that the Pensions Act 2011 provides that, in periods when CPI inflation is higher than RPI, schemes which uprate benefits by reference to RPI still meet minimum statutory requirements. It also says that, where RPI is not published for a month, uprating by reference to ‘any substituted index or figures’ published by the ONS would also meet the test. We’re not there yet: RPIJ is being assessed for national statistic status, and RPI will, the ONS says, still be published. However, if those elements change, many sponsors might find RPIJ an attractive prospect.

 *apologies for the earworm.

Helen Powell is a senior professional support lawyer at Allen & Overy LLP.

Comments published on Pensions Talk do not necessarily reflect the views of Allen & Overy or its clients.

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