While it is increasingly seen as a flawed measure of inflation, RPI continues to be calculated (reluctantly) by the UK Statistics Authority and used to determine payments on index-linked gilts (and student loan debt and rail fare increases amongst other things).
Despite some recent delay in making a formal decision, reform of RPI is, in our view, still warranted and likely before 2030.
It would appear only a matter of time before consumer price index-linked or CPIH (CPI including housing costs) bonds are launched by the UK Debt Management Office. More clarity should emerge next year in the consultation period.
Change could be positive for the UK pension sector, which invests heavily in gilts.
Overall for defined benefit pension providers a reduction in RPI would be helpful – their index-linked liabilities (close to 100%) exceed their index-linked assets (and their deficits would likely come down if a lower inflation rate were used).
Howard Cunningham, portfolio manager, Newton Investment Management.