The Retail Prices Index (RPI) is “flawed” and should be scrapped as a measure for inflation, Institute for Fiscal Studies (IFS) director Paul Johnson has said.
An independent review of UK consumer price statistics carries out by Johnson for the UK Statistics Authority, said there were “basic statistical flaws” in the construction of the RPI and called for the government and regulators to replace it with the Consumer Prices Index as their main measure of inflation.
Johnson said the CPI was a “well-constructed” measure of inflation which users should have confidence in. He added however that while the CPI was reliable, it should also account for owner occupiers’ housing costs (CPIH).
The Johnson Review added the ONS should “restate that the RPI is a flawed statistical measure of inflation…whose use should be discontinued for all purposes unless there are contractual commitments at stake” and calls for the “eventual discontinuation” of RPI. It warned, however, that this must be “carefully managed over an extended period” because there were many long-term RPI-linked contracts.
Towers Watson senior economist Jonathan Gardner said should the recommendation be accepted, CPIH could be used for uprating defined benefit pensions currently linked to CPI, as well as being used in the state pension ‘triple lock’.
He added: “Ultimately, moving to CPIH might not make any difference to the pension increases that schemes have to award. If the Bank of England successfully targeted 2% CPIH inflation instead of 2% CPI inflation, the inflation number should be the same even if it is measuring something else.
“Pension liabilities would only change if the way pensions are uprated changes while the Bank’s target – and likelihood of meeting it – does not. CPIH inflation has been identical to CPI inflation in recent months, having been slightly lower in the previous three years, but this relationship could change in future.”
Barnett Waddingham actuary Richard Gibson said Johnson’s recommendations would clear up any ongoing confusion over the many different inflation measures used in the UK, but said it was “disappointing” that the review had not recommended the development of a new index.
He added: “This popular confusion also affects defined benefit pension schemes – there have been some significant recent legal cases brought by trustees and employers to challenge which index they should be using.
“The report as it stands contributes usefully to this debate and, if these recommendations can be accepted, over the longer term we might see schemes which felt confident that they should be providing CPI-linked benefits rather than RPI-linked – reducing pension liabilities for UK companies.”
Comments