[uk_rpi] [reforming_RPI]

Now that RPI is no longer an officially robust index, HMG have stated that it is intended to move away from RPI. In fact, it might have been easier and faster to repair RPI but that option seems to have been discarded.

In September 2019, the UK Statistics Authority (“UKSA”) announced that it intended to address the shortcomings of RPI by bringing the methods and data sources of CPIH into RPI. Because RPI is still specifically required for two index-linked gilts, the Chancellor’s consent is required for implementation before 2030. The Chancellor announced that he would consult publicly on whether the change should be made at a date other than 2030 and, if so, when between 2025 and 2030. The consultation was launched at the Budget on 11 March 2020, with responses welcome until 21 August 2020 (extended due to Corona). On 25 November 2020, the results of the Consultation were announced, confirming that RPI will be aligned with CPIH as proposed, but not before 2030. CPIH has only been built since January 1989, substantially shorter than CPI.

No compensation will be offered to index-linked gilt holders. The proposal appears to be to link future coupons and capital repayments to CPIH rather than to RPI. Effectively, that would be expropriation because CPIH tends to increase more slowly than RPI. As hoped for by many, HMG could have sought something practical and fair, such as replacing RPI by “CPIH + X”. If “X” is too low, we have expropriation. Should it be too high, that will be unfair to taxpayers.

On this website, we have previously been tracking the difference between RPI and CPI, which has been considered below. We consider it likely that using CPIH would produce figures of the same order as CPI. Over 1 year, and over 15 years, the difference between RPI and CPI has been pretty static at around 0.7% pa. Although it is often claimed that the difference averages out at 1.0% pa, that is extremely unlikely

As at 22 April 2022, we have estimated that the issued capital was around 513 b (nominal linked to date), with a total market value of 1,154 b, of which 837 b relates to stocks redeemable after 2030. If the current proposals are implemented, then broadly, if one were to use a constant mean differential between RPI and CPIH of 0.7% pa until redemption, we estimate that the compensation required would be worth 90 b.

Different assessments have been suggested by others but we do not know what assumptions have been made and their calculations were made earlier than ours. As examples for implementation from 2030, Insight Investment’s figure was 90 b (November 2019), PPI’s figure was 60bn (April 2020) and ABI’s figure was 96 b (August 2020).

It should be added that three large UK pension schemes (BT, Ford and Marks & Spencer) have been granted permission for a judicial review, which may take place during Summer 2022. The Government’s defence was expected in February 2022 but we’ve not seen it yet.