UK High Court Says RIP to RPI | Chief Investment Officer

The U.K.’s High Court has shot down a challenge from the pension funds of BT, Ford and Marks and Spencer to overturn the government’s plans to alter the Retail Prices Index, which measures inflation.

In September 2019, the U.K. Statistics Authority announced that it would align the Retail Prices Index with the consumer prices index including owner occupiers’ housing costs, or the CPIH. The U.K. has been using the RPI to measure inflation since 1947, but in recent years this has been deemed inferior to the CPIH, which has been the U.K. government’s lead inflation indicator since 2017.

The pension funds challenging the UKSA have substantial liabilities for index-linked pension payments, and are heavily invested in RPI-linked gilts as part of a strategy aimed at matching their liabilities. U.K. investment consultant Lane Clark & Peacock has said that the use of a new method for measuring inflation will have “vast consequences” for pension plan sponsors and trustees, even though the change might not occur until 2030.

According to the pension fund’s complaint, there are 10.5 million people in the U.K. with private sector defined benefit pensions, a majority of whom have pension plans linked to the RPI. They estimate that those people will receive reduced payments amounting to approximately 4% to 9% of their lifetime benefits, with women experiencing on average a greater reduction.

The CPIH is expected to be around 1% less per year than the current RPI, which Lane Clark & Peacock said means that DB plan members with RPI-linked increases can expect to receive lower pensions than they otherwise would have from 2030, or possibly earlier. According to the pension funds, the anticipated 1% reduction in the RPI, affecting future interest payments to holders of the gilts, is said to have resulted in the value of the relevant gilts falling by approximately £90 billion to £100 billion.

The pension funds argued that the UKSA’s RPI decision falls outside the scope of its power to amend the RPI under the Statistics and Registration Service Act 2007. However, the High Court disagreed.

“The UKSA has the power under the SRSA 2007 to amend the RPI by bringing the methods and data sources of the CPIH into the RPI,” the ruling states. “That power includes the making of ‘fundamental changes’ to the coverage or basic calculation of the RPI.”

According to Lane Clark & Peacock, actuarial valuations, company accounting and long-term funding targets will be affected, while buy-in and buy-out insurers and consolidators may eventually charge less to take on RPI-linked benefits. The investment consultant also noted that plan sponsors should consider the issue carefully, particularly if they are involved in buying or selling index-linked gilts or similar swaps, buy-ins and buy-outs, changing the index used for pension increases, transfer value or pension increase exchange exercises and long-term journey planning.