The UK Government has announced its conclusions into a review of  the Retail Prices Index (RPI) calculation.

This was originally calculated in 1947 and was the official measure of inflation until being replaced by Consumer Price Inflation (CPI).

Whilst RPI hasn’t been the officially-quoted measure of inflation for some 10 years, it’s still used to determine payments for UK index-linked gilts (ILG’s) – UK Government-issued bonds that pay a yearly payment (coupon) and a final payment which increases in line with increases in RPI. It’s also used, in many cases, to calculate year-on-year increases for pension payments, albeit with a cap in many cases.

The Government proposed to change the RPI calculation to a method used for another measure, known as CPIH, and was looking to implement the change sometime between 2025 and 2030. It’s estimated that because of the differences of the calculation methodology, the new method would result, on average, in a number 1% lower than the current method (i.e. if current RPI was 3% over a one-year period, CPIH would be 2%).

The resulting impact of the change is therefore three-fold:

  1. to affect the value of the assets held by investors in index-linked gilts or assets priced in relation to index-linked gilts (in which pension fund trustees and insurance companies are big investors) - this is because the payments made will fall when the RPI measure falls
  2. to affect the pension payments paid to individuals receiving pensions linked, in any way, to increases in RPI past 2030
  3. to affect the cost of providing the pensions in 2), i.e. the amount of money that trustees of pensions schemes will need to hold to pay the pensions.

HM Treasury and the UK Statistics Authority concluded that:

  1. the calculation of RPI will be changed to align with CPIH in the way proposed, estimated to result in a fall in RPI of 1% p.a. from 2030 (see 2)
  2. the change will take place from 2030 – the Government put forward options to implement from 2025 to 2030 and hassettled for the latest date following the consultation
  3. there would be no compensation for index-linked gilt holders to account for the expected fall in income.

Market reaction

In terms of reception to the decision, it’s considered that the implementation date is the best case of the options put forward. However, the vast majority of index-linked gilt holder respondents have called for further mitigation in the form of compensation.

The initial market reaction was positive, albeit muted, with index-linked gilts (those maturing from 2030 to 2050) increasing in value by around 1% to 1.5%.It remains to be seen what the longer term impact on index-linked gilt prices is once the positive news of the later date of 2030 sinks in alongside the fact that no compensation is to be paid. This small rise in the market price (fall in yields), happened at the time of the publication of the Government’s conclusions which indicates that the investment market had priced in a worstcase scenario, such as implementation prior to 2030. The chart below was the 20 yield on an index-linked gilt maturing in 2040.

So what does this mean for pensioners?

All pension scheme members whose benefits are linked to increases in RPI, will see a fall in the value of their benefits. This is because any pensions paid from 2030 onwards will increase at a lower rate. The government was aware of this and indicated that this is one of the reasons it went for the later date of 2030, as this will result in a smaller impact on pension payments i.e. from a later date.

So what does this mean for trustees of defined benefit pension schemes?

Whilst virtually all members will be negatively impacted by this change, the impact on defined benefit pension scheme trustees will depend on how both their assets (the money they hold to fund pensions) and the liabilities (the cost of providing the pensions) will change. In all cases where RPI is used in any way to calculate the pensions, then the cost of providing pensions will fall. This in itself would increase the funding position of defined benefit pension plans.

However, many pension fund trustees hold assets that insure against the cost of providing pensions, namely index-linked gilts and other assets priced similarly to these. If in the short term these assets have increased in value, so funding will have improved, if in the longer term these assets fall in value, then this could lead to a different position and, in some cases, could lead to funding position worsening.

We don’t see any need for any immediate reaction, but trustees should take all this into account when reviewing their investment strategy and, in particular, the extent to which they invest in assets which are insurance against the cost of providing pensions, at the next available opportunity. 


In the UK Government’s budget on 11 March, the government and UK Statistics Authority (UKSA) launched a consultation on the UKSA’s proposal to align the calculation of the Retail Prices Index (RPI), with the calculation of the CPIH measure of consumer price inflation. 

The consultation closed for responses on 21 August and the Government has, today, published its response to the consultation.

The consultation covered the technical issues with making the change and, also, the timing of any change. The change is estimated to reduce the year on year increase in RPI by around 1% p.a., although it is not clear how much of the change is already being priced into the market.

Written by


Bobby Riddaway

UK Pensions Consulting Market Director, Capita

Bobby's role involves building the profile of the pensions consulting capabilities of Capita and delivery of our thought leadership to the Market. He also acts as a Senior Investment Consultant across a portfolio of clients. He was the Head of Capita's Investment Consulting Practice from 2013 to 2018 before returning to a fully client focussed role in May 2018. As Head of practice he grew the team, established a manager research function and brought investment strategy modelling and manager research in house.

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