RPI to CPIH: Why is it taking so long?

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The consumer price index rose by 1.3% in the 12 months to December, which might be good news for consumers but bad news if you have any assets or income that rise with inflation. Unless, that is, it is pegged to the retail price index – but that, too, will change. Or will it?  
 
RPI is normally higher than CPI. It is also flawed, as experts have long agreed, and its demise has been called for both by the UK Statistics Authority and the House of Lords Economic Affairs Committee but the index is remarkably resistant to being put to rest.  
 
Last year, following the Lords select committee report, chancellor Sajid Javid finally agreed to grasp the nettle, but at as leisurely a pace as possible, it seems.  
 
Having previously said that a consultation on how to replace RPI with CPI including housing costs, or CPIH – the statisticians’ preferred measure and “conceptually the best” according to the government – this has now been delayed until March to coincide with the Budget, for no obvious reason other than that the election has delayed everything. 
 
The consultation that will run between 11 March and 22 April will ask, among others, “whether the proposed correction should be made at a date other than 2030, and if so, when between 2025 and 2030”. It is therefore quite likely that RPI will be around for up to 10 years – and could be around for much longer if transitional measures allow it to continue to be used in the private sector.  
 
The length of the phase-out has been criticised by many, not least Sir David Norgrove, chair of  UKSA, who previously said the authority regretted the fact that no change will occur before 2025. 
 
The chancellor’s consent to any change to RPI that is causes material detriment for index-linked bond holders is only required until 2030. It seems clear that politicians would prefer not to be directly associated with any change that could do this, and so it is quite likely that none will occur before 2030.  
 

Will DB members with RPI take schemes to court if measure changes? 

 
Should RPI indeed be ‘replaced’ by CPIH, this would render many scheme rules that cite RPI obsolete, and it might only be a matter of time until a disgruntled defined benefit member takes its scheme or the government to court over having their benefits reduced. 
 
A move away from RPI “could have far-reaching implications for savers, investors and consumers”, warned Tom Selby, senior analyst at investment platform AJ Bell, like the benefits reduction for DB members currently enjoying RPI increases. 
 
Sponsors would see a reduction in their liabilities as a result of lower increases; it is not clear if pension schemes invested in index-linked gilts would also be affected – if they are, it would reduce the yield on their holdings. 
 
To mitigate any negative impact on people with pensions and investments explicitly linked to RPI, Selby said the government might decide to “maintain a notional RPI which these contracts could then adopt, although this might mean RPI remains part of the system for decades”. 

What are the chances of RPI being replaced before 2030?

Ian Neale
Steven Cameron
 

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