The Government’s decision to change the indexation of pensions in payment from the Retail Price Index (RPI) to the Consumer Price Index (CPI) has been controversial and has proved difficult to implement. It has caused legal difficulties for many pension schemes, and sponsors and trustees have also struggled to ensure that asset portfolios are structured in a way that permits appropriate funding. A further complication has arisen from the more recent adoption of the Consumer Price Index including owner occupiers’ housing costs (CPIH) as the appropriate index to be used. We asked three experts to identify the various issues that trustees need to address and suggest ways in which they might be suitably resolved.


RPI has long been discredited as a measure of inflation. It was replaced by CPI in 2011 as the basis for statutory pension increases and revaluation. This led to something of a rules lottery for pension schemes. For some schemes, CPI flowed through automatically, while others ‘hardwire’ RPI. Many more have rules that are open to interpretation, which led to a long line of cases in which trustees and employers have asked for the Court’s help in working out whether their rules allow them to make the switch.

Further change is now in the air. The Chair of the UK Statistics Authority (UKSA) wrote to the Chancellor in March 2019 making two recommendations:

(i) That the publication of RPI should cease; and

(ii) In the meantime, the shortcomings of RPI be addressed by adopting the methods of the CPIH measure. In other words, RPI would become CPIH by another name.

The Statistics and Registration Service Act 2007 provides that before any change can be made to RPI, the UKSA must consult the Bank Of England as to whether the change is a fundamental change which would be ‘materially detrimental’ to the interests of holders of index-linked gilts. If the Bank of England says yes, then the change requires the consent of the Chancellor. The Bank of England did say yes, so the Chancellor’s consent is required to any change before 2030.

The Chancellor has replied to say he will not, at this stage, agree to option one. But he proposes to consult in January 2020 on aligning the calculation of RPI with that of CPIH at some point between 2025 and 2030. However, following the General Election, it remains to be seen whether this has affected the proposed consultation.

It was a missed opportunity for the Government not to legislate to allow all schemes to move to CPI if they wished. Perhaps in the future we will get a more level playing field for schemes mandating RPI in their rules, but it’s not going to happen quickly.

Tamara Calvert
Partner – DLA Piper


The funding implications of any changes to RPI from 2030 could vary significantly from scheme to scheme and will undoubtedly add an extra twist to actuarial valuation discussions.

The ‘technical provisions’ measure used to determine a scheme’s deficit under the current funding legislation depends on both the level of pension payments that the scheme is expected to make and the expected return on its assets. Changes to RPI could affect each of those components, depending on the scheme’s benefit structure, the investment strategy and how the valuation assumptions are set.

Schemes will have seen a dip in the value of any RPI-linked assets (such as index-linked gilts or inflation swaps) around the time of the Chancellor’s 4 September statement, with a further decline over the following couple of months. Any assessment of how much of this fall is due to revised expectations of future price inflation rather than other factors is inevitably subjective, but the view from analysts generally seems to be that a complete alignment of RPI with CPIH from 2030 onwards (or earlier) is not yet priced into markets. That might reflect either the uncertainty over whether a change will happen or the possibility of compensation for investors, in which case there could be further changes in asset values to come as investor views develop.

If a scheme’s pension increases are based entirely on CPI, the projected future payments are unlikely to be affected by any changes to RPI. However, if the scheme has any inflation hedging using RPI-linked assets, the value of these assets will already have fallen; if you believe that RPI will be aligned with CPIH from 2030 onwards, that could act as a further drag on the return on the scheme’s RPI-linked assets, placing further pressure on the funding position.

At the other extreme, if the scheme increases are linked to RPI, the expectation might now be that future pension payments will be lower, reducing the liability value; if the scheme is partially inflation-hedged the effect on the funding position might then be slightly positive. If there is any compensation for investors, the funding position could improve further.

Trustees and sponsors will need to think very carefully about how changes could affect their scheme under different scenarios, ensuring that they take a consistent view of how the scheme’s liabilities and assets (and possibly the sponsor’s financial position) would be affected in each scenario.

Graham McLean
Head of scheme funding – Willis Towers Watson


From a portfolio perspective, pension schemes have tended to hedge the majority of inflation-linked liabilities with RPI Swaps and Index-Linked Gilts. For example, a 20-year RPI-linked assets faces a material re-pricing downwards of up to 5% if the Chancellor’s proposals are implemented (November 2019 market conditions).

Aligning RPI with CPI-H would have two key implications on pension schemes funding levels:

1. A loss from any CPI-linked liabilities that have been proxy hedged with RPI-linked assets (as hedging assets would fall whilst liabilities remain unchanged)

In practice, most pension schemes’ CPI linkage tends to be highest during the next 10 years (deferred revaluation). As a result, proxy hedging these increases with RPI linked assets is less exposed to RPI reform given that reform is only expected to impact RPI after 2030. Whilst the impact will be very scheme-specific, a typical scheme with high inflation hedging levels could face a circa 0.5-1% funding drop. Indexation Complication / Bringing Pensions together / Another record year in bulk annuities and more to come in 2020 By Paras Shah, Head of LDI, Cardano

2. A gain from any RPI-linked liabilities that have not been fully hedged (as liabilities would fall)

So, what can be done to protect from changes?

Pension schemes could switch to using CPI-linked assets to hedge CPI linked liabilities. However, in practice the CPI linked asset market is fairly illiquid and has limited supply at longer dated tenors.

Alternatively, schemes could reduce hedging of longer dated CPI-linked liabilities which are being proxy hedged with RPI-linked assets. However, in practice this means schemes would be exposed to outright movements in inflation levels.

Trustees should also note that considerable uncertainty remains on the outcome of any reform:
• Proposals could be further amended under a new government
• RPI may be reclassified as CPIH + X p.a. where the spread is representative of the difference between the two measures; in this case funding levels would not be materially impacted
• RPI asset holders (e.g. Index Linked Gilt holders) could be compensated by the issuer of the asset. In such a scenario, schemes could expect a windfall funding level gain.

In summary, pension schemes should ensure they conduct appropriate scenario analysis to understand the implications of reform, noting that considerable uncertainty remains on any changes.

Paras Shah
Head of LDI – Cardano

It is clear that changing the index for pensions increases has proved complicated. Whilst the pensions industry continues to struggle with its implementation, it is clear that reaching final resolution is still several years away.

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