UK launches consultation on retail prices index reform

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The government and the UK Statistics Authority have launched a joint consultation on reforming the Retail Prices Index (RPI) that could have implications for pension schemes. The consultation invites input through 22 Apr 2020. Proposals include using the Consumer Prices Index (CPI) — including owner-occupiers’ housing costs (CPIH) methodology — to calculate the RPI; this likely would bring RPI increases closer to those of the CPI, which tends to be lower. Changes would be implemented between 2025 and 2030.

Changing the RPI to reflect CPIH inflation could have the following consequences for pension schemes:

  • Coupons paid out on index-linked gilts — low risk investment bonds — would likely be reduced and the value of gilts already purchased would be reduced.
  • Schemes with benefits linked to RPI are likely to see a reduction in liabilities, and to the extent that their liabilities are hedged using index-linked gilts, the effect on funding could be minimal.
  • Schemes with benefits linked to CPI using index-linked gilts to hedge their liabilities could see a fall in their funding level.

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Sebastian Bleasdale
by Sebastian Bleasdale

Senior Associate, Mercer Wealth

Fiona Webster
by Fiona Webster

Principal, Mercer’s Law & Policy Group

Stephanie Rosseau
by Stephanie Rosseau

Principal, Mercer’s Law & Policy Group