[uk_rpi] [reforming_rpi]

Now that RPI is no longer an officially robust index, HMG have stated that they intend 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 over 15 years.

As at 31 December 2023, the total market value of ILGs  was 593 b (DMO), of  which 428 b related 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, then we  estimate that the compensation required would be worth 38 b.

In the past, different assessments have been provided by others but we do not know what  assumptions have been made and their calculations were made somewhat 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).

Three large UK pension schemes (BT, Ford and Marks & Spencer) were  granted permission for a judicial review, which took place during June  2022. Judgment was handed down in September 2022 and the applicants  failed. We think that judgment is well worth reading.