Question to the HM Treasury:

To ask the Chancellor of the Exchequer, what assessment he has made of the potential effect of the proposed changes to the formula for calculating the Retail Price Index, set out in his Department's response to the Consultation on the Reform of RPI Methodology, on the risk of insolvency for employers, as a result of the need to address the shortfall in funding of their workplace pension schemes.

On 25 November, the Government and UK Statistics Authority (UKSA) published their response to the consultation on the timing of reform to the Retail Prices Index (RPI). Owing to shortcomings in its calculation, UKSA intends to bring the methods and data sources of the Consumer Prices Index including owner occupiers’ housing costs (CPIH) into RPI.

The consultation launched at the Budget on 11 March 2020. Originally, the consultation was set to run for six weeks, closing on 22 April 2020. However, due to the impacts of the coronavirus (COVID-19) pandemic, the Chancellor and UKSA Board decided to extend the consultation to 21 August 2020. At the close of the consultation, the Government and UKSA had received 831 written responses. As Economic Secretary to the Treasury, in July 2020 I chaired two roundtables comprising representatives of index-linked gilt holders, to hear their views on the impact of the timing of reform. The details of these meetings can be found in Annex D of the response document.

As detailed in the response document, the holders of a majority of index-linked gilts are seeking to match inflation-linked liabilities. This means that they use the returns from index-linked gilts to hedge against inflation-linked liabilities. Such investors include some defined benefit (DB) pension schemes. How such schemes’ funding positions will be impacted by reform will depend on the extent to which they are hedged and the nature of their liabilities. For some DB pension schemes, a deterioration in their funding position means that existing deficits may increase, or that surpluses may be reduced. The vast majority of index-linked gilt investors who responded to the consultation noted a strong preference for UKSA’s proposal to be implemented as late as possible, i.e. in 2030, in order to allow index-linked gilt holders as much time as possible to adjust to the reform of the RPI and to minimise any potential negative impacts they may face.

As part of the response, the Chancellor announced that while he sees the statistical arguments of UKSA’s intended approach to reform, in order to minimise the impact of reform on the holders of index-linked gilts, he will be unable to offer his consent to the implementation of such a proposal before the maturity of the final specific index-linked gilt in 2030. As it stated in the response, it is UKSA policy to address the shortcomings of RPI in full at the earliest practical time. The change proposed can legally and practically be made by UKSA in February 2030.

For further information please see the consultation response at: https://www.gov.uk/government/consultations/a-consultation-on-the-reform-to-retail-prices-index-rpi-methodology.