Changes to the Retail Prices Index


16th April 2021

The UK Government and UK Statistics Authority confirmed on 25 November 2020 that the Retail Prices Index (RPI) is to be set equal to the CPIH (Consumer Prices Index including Housing) from 2030.

There are differences between RPI and CPIH, both in the items that are included in the calculation and in the method of averaging.  RPI is calculated as an arithmetic average of the prices of the individual items (add up the prices and divide by n, n being the number of items), while CPIH is a geometric average (multiply all the prices together and take the nth root).  This has led to CPIH being lower than RPI and, more significantly, CPIH inflation being lower than RPI inflation.

Therefore, the effect of the change in RPI is that, from 2031, where increases in pensions are linked to RPI, those increases are expected to be about 1% lower each year than would otherwise have been the case.  For schemes that hold index-linked Gilts, the returns on those Gilts will also be about 1% lower than would otherwise have been the case.  Employers with schemes that have not hedged all of their inflation risk will gain, in that the value of the scheme’s liabilities will fall by more than the value of its assets, though the quid pro quo is that members of those schemes will receive lower benefits.  The opposite will apply to schemes that pay increases based on CPI but have hedged their inflation risk with RPI-linked Gilts.

However, the trustees of the BT Pension Scheme, Ford Pension Schemes and the Marks and Spencer Pension Scheme have announced (on 9 April 2021) their intention to seek a judicial review of the move, so it remains to be seen whether the change will actually materialise.