RPI: reprieve, not RIP


British pension scheme sponsors have won a reprieve. Rishi Sunak, the UK chancellor, has held off scrapping the retail price index before 2030. That ends a fraught debate that pitted would-be beneficiaries — those paying RPI-linked interest rates on student loans, say, or train fares — against potential losers. Chief in that camp were pension funds obliged to match RPI-linked liabilities.

There is little doubt on either side that RPI — the UK’s oldest measure of inflation — is a flawed metric. Its shortcomings include its treatment of housing costs and distorted population coverage: it omits the expenditure of the wealthiest 4 per cent of households. 

RPI is based on a formula, the Carli index, that falls short of international statistical standards. Since 2010 it has, on average, put the annual rate of inflation a full percentage point ahead of the newer CPIH, a consumer price index that includes owner-occupier housing costs. The Institute for Fiscal Studies in 2015 calculated that cost taxpayers £2bn a year.

Mr Sunak was right to avoid switching indices in 2025, as statisticians wanted. The government is a keen issuer of index-linked gilts, currently tied to RPI. Lapped up by defined benefit pension funds seeking to match liabilities, they are a useful form of debt for the government. Last fiscal year, the Debt Management Office had a remit to sell £22.6bn of the instruments.

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Sure, a lower interest rate would have saved the government £2bn a year. But that is a drop in the ocean when overall debt is at the highest since the early 1960s. And for all pension funds’ fears, it is unclear what the net effect would have been; if net RPI-linked liabilities had matched “linker” gilt holdings, the change would have been net neutral for some schemes.

The last relevant outstanding linker, a 4.125 per cent gilt, is due to be redeemed in July 2030, with its redemption value predicated on RPI data published in December 2029. Investors will still receive the broad inflation protection they cherish.

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