Employer Action Code: Act

The National Statistician (the U.K. government's principal advisor on statistics) launched a consultation on October 8 to gather opinions on the formulas used to construct the Retail Prices Index (RPI). The RPI is a U.K.-specific inflation index that is commonly used to calculate guaranteed levels of pension increases and payouts on U.K. inflation-linked government bonds (index-linked gilts).

Key Details

If the National Statistician recommends a change, we expect the announcement in January 2013. The Bank of England would then have to consider whether the proposed change is both fundamental and materially detrimental to the interests of those holding certain index-linked gilts. If the bank concluded that it was, then any change made would require the approval of the Chancellor of the Exchequer (the head of the U.K. Treasury).

The February 2013 inflation data, published in March 2013, would be the first data affected by any such change.

Implications for Employers

The call for comments raises options that range from no change to fully aligning the RPI's various price aggregation techniques with those used in the U.K. Consumer Price Index (CPI). Any of the proposed changes would likely lead to lower RPI inflation (all other things being equal).

Many benefits from U.K. pension plans remain linked to RPI, and any change could reduce the value of pension liabilities for U.K. sponsoring employers, improving their balance sheets and potentially reducing funding demands from pension plan trustees.

Based on the difference between RPI and CPI during 2012, fully aligning the calculation methodologies with those used in the CPI could reduce future RPI inflation by up to 1% per annum.

Immediate actions for employers include:

  • Employers that are midway through a funding valuation of their pension plan may want to investigate how the potential changes could impact plan benefits payable. The impact will vary by plan and will depend on the proportion of benefits that are linked to the RPI. It may be worth delaying sign-off on the plan's valuation until the issue is resolved.
  • Employers with a fiscal year ending Dec. 31, 2012, may wish to consider whether the inflation assumptions used to value their pension plan liabilities remain appropriate. Due to the considerable uncertainty, there is likely to be a wide range of acceptable assumptions on Dec. 31, 2012.