The government should switch to using one single general measure in order to fix an error in the retail price index (RPI), in a move which could negatively affect private sector pension deficits.

A report by the House of Lords Economic Select Committee published yesterday, 17 January, suggested that the current position of the UK Statistics Authority (UKSA), which uses RPI as a legacy measure, is “untenable”, particularly when used to uprate private sector pensions.

Furthermore, the Committee recommended to switch to using the consumer price index (CPI) in the interim, to prevent “shopping in the interim”.

In 2010, UKSA made a change which had “unintended consequence” of creating a difference in the way price averages are calculated, widening the gap from around 0.5 per cent to 0.8 per cent.

UKSA has “refused repeatedly” to correct the problem, according to the Committee.

Committee chairman Lord Forsyth of Drumlean, said: “The present position of the authority is untenable. Rather than pre-empting the decision of the Chancellor, it should fulfil its statutory duty to promote and safeguard the quality of official statistics and to do that, it should request a fix to the clothing problem.

“The Chancellor should approve this change regardless of the effects on index-linked gilt holders, holders of which before 2010 received an unwarranted windfall.

“Given RPI remains in widespread use, the authority should stop treating RPI as a legacy measure and resume a programme of periodic methodological improvements.”

According to Aviva Investors head of LDI, Rakesh Girdharlal, the report could result in a lower RPI by 0.3 per cent per annum, leading to lower asset values and higher pension deficits.

“The report has significant implications for trustees and pension schemes given its impact on the future measuring of scheme funding levels. As trustees typically match all inflation risk (RPI and CPI) with RPI-linked assets,” he said.

“If the RPI flaws are fixed, this will result in lower asset values, which will worsen pension deficits.”

“In light of Thursday’s report, we would expect that future issuance of CPI-linked assets is likely to increase, as will demand from pension schemes. It will be important to monitor the levels of inflation linkage that could be available via these assets.”

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