(Not) the end of the RPI CPI wedge

10 January 2013
For professional investors and advisers only
(Not) the end of the RPI CPI
Implications for DB pension schemes
Jonathan Smith, UK Strategic Solutions, Schroders
As covered in our June and September articles last year, the Consumer Prices Advisory
Committee (CPAC) has been consulting on whether the RPI and CPI calculation
methodologies should be brought more into line. At 7am this morning the National
Statistician published her recommendation. There is to be no change to the RPI calculation
This is likely to come as a surprise to both the markets and to pension scheme stakeholders,
as most had anticipated at least some change.
What has the National Statistician recommended?
CPAC has been consulting on whether the “formula effect”, which causes most of the difference
between the levels of CPI and RPI, should be reduced or eliminated. By most estimates the formula
effect causes RPI to be around 0.75% - 1% higher than CPI. Whilst acknowledging that in its current
form RPI “does not meet international standards” the National Statistician has recommended that
the formulae used to calculate RPI remain unchanged.
Instead, a new measure of inflation – RPIJ, will be produced alongside RPI. This will be calculated
more in line with CPI. However, crucially for UK pension schemes and investors, existing index
linked gilts and pension scheme benefits1 will continue to use the current RPI measure for
The National Statistician has not given many details as to the reasons for her decision. It is likely
that it is at least in part due to the desire to maintain the confidence of index linked bond holders and
other users of RPI, who would potentially have lost out should RPI have changed.
Implications for UK defined benefit pension schemes
Recent language from CPAC had suggested that at least some change was on the cards. Therefore,
this morning’s announcement will come as a surprise to many. Some will be disappointed - a
reduction in the RPI CPI wedge would have reduced the cost of paying defined benefit liabilities
substantially for some pension schemes.
On the other hand, the National Statistician has probably helped the Chancellor avoid a tricky
political decision. As well as helping to placate index linked bond holders, this decision means that
pensioners with benefits that reference RPI will not be detrimentally affected.
In terms of the market, this morning has seen a rise in the value of index linked gilts and other RPI
inflation linked assets.
Where these reference RPI rather than CPI
(Not) the end of the RPI CPI wedge
For professional investors and advisers only
Managing inflation risk is already high on the agenda for many pension scheme trustees. This
morning’s announcement removes a degree of uncertainty and allows pension scheme trustees to
consider their medium term inflation protection strategy with a greater degree of confidence.
There is a wide range of risk management strategies that can be applied to pension schemes’
inflation risks. If you would like to discuss the issues covered in this article further, please contact
your Client Director or a member of the UK Strategic Solutions team.
Important Information
The views and opinions contained herein are those of Jonathan Smith, UK Strategic Solutions at Schroders, and
may not necessarily represent views expressed or reflected in other Schroders communications, strategies or
For professional investors and advisers only. This document is not suitable for retail clients.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect.
The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is
not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations.
Information herein is believed to be reliable but Schroder Investment Management Limited (Schroders) does not warrant
its completeness or accuracy. No responsibility can be accepted for errors of fact or opinion. This does not exclude or
restrict any duty or liability that Schroders has to its customers under the Financial Services and Markets Act 2000 (as
amended from time to time) or any other regulatory system. Schroders has expressed its own views and opinions in this
document and these may change. Reliance should not be placed on the views and information in the document when
taking individual investment and/or strategic decisions.
Issued by Schroder Investment Management Limited, 31 Gresham Street, London EC2V 7QA.
Registration No. 1893220 England.
Authorised and regulated by the Financial Services Authority.
For your security, communications may be taped or monitored.