Official UK inflation measure changes to CPIH

A recent announcement by the National Statistician could have future implications for UK pension schemes, depending on actions taken by the government.

Consumer price index (CPIH) will become the preferred measure of inflation of the Office of National Statistics (ONS) from March 2017.  The ONS have also decided to cease publishing the retail price index (RPIJ).  This follows a wide-ranging review of consumer prices over the last few years.

Recap of Inflation Measures

  • UK-specific index begun in 1947
  • Index underlying UK inflation-linked debt
  • European standardised inflation measure set by Eurostat
  • Statutory measure for public and private sector pension indexation
  • Modified version of CPI to incorporate owner-occupier housing costs
  • ONS preferred inflation measure form March 2017
  • Introduced in 2013 to assess the main part of the 'formula effect' between RPI and CPI
  • Set to be discontinued

At present, the UK government uses RPI as the reference index to issue inflation-linked debt and CPI as its central measure for inflation targeting and many other official purposes, including statutory minimum pension increases.  Although there may be no immediate impact for many UK pension schemes as a result of the ONS decision, it is possible that the government could take further action.

Possible Implications

There has been no word from HM Treasury at the date of publication as to whether the government’s central inflation target will now change.

The government may want to reconsider its use of inflation indices in light of the National Statistician’s announcement and it will need to decide if, following Brexit, the CPI (a measure governed by an EU body) remains appropriate as the index for state pensions – and the statutory index for private and public sector pension increases.

If the government were to issue CPIH-linked debt, that would provide new options to pension funds who are seeking assets which more closely match their liabilities and would likely reduce buy-out prices for many schemes.

A limited number of pension schemes have the ability to alter their reference index for pension increases in deferment or payment.  Some consultants in the pensions industry had suggested that RPIJ could be adopted by pension schemes in preference to RPI, but this will not be an option now that RPIJ is being discontinued.

It is possible that we may hear more in the Chancellor’s Autumn Statement later this month.

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