The retail price index is due to fall by around 1% a year under proposals from the UK Statistics Authority (UKSA), as it seeks to align it with the consumer price index, including housing costs.
The authority, in consultation with HM Treasury, announced that it is seeking views on potential technical issues that could arise from switching the way RPI values are calculated to the same methods and data sources as those for the CPIH. That includes when the changes should be enacted in 2025, 2030 or a date in between.
A change to the methodology for the RPI will affect both the assets and liabilities of those holders of Gilts, the consultation papers stated.
“The net effect on these investors’ balance sheets is uncertain in aggregate, and will also vary by individual investor,” it said.
Following the switch, monthly growth rates for the RPI and CPIH will converge, while the annual rates will become the same after the first year.
However, a survey by the Society of Pensions Professionals found that just over half of pensions professionals thought that the reform should go further than just switching to CPIH methodology without compensation.
Hemal Popat, Partner at Mercer, said: “We have long recognised the weaknesses of RPI as an inflation measure and we are pleased to see that the RPI consultation has been broadened to investigate the wider impacts of RPI reform.”
“RPI reform is a major concern for pension funds and other investors in the index-linked Gilt market. Many pension funds have experienced sharp declines in funding levels this year due to equity market turmoil and falling Gilt yields,” Popat said.
The consultation closeed on 22 April and the government and UKSA have said a response will be issued before the parliamentary summer recess.