RPI changes coming....CPI from 2025

MarkCarnage

Today's FT reports that there will be a 'consultation' at the time of the March Budget about the proposed changes to RPI (which will bring it pretty much in line with CPIH). However, it appears that the consultation won't be about the methodology changes, which will reduce RPI number by around 0.6%, but only on whether it will happen in 2025 or 2030. Javid said last September it was changing, which knocked the index linked gilt market quite hard at the time, but it's still causing a bit of a stooshie in the ILG marketplace. 
Basically it will mean that it's unlikely to matter in practical terms whether Scheme rules state that a pension will rise with RPI or CPI as they will end up much the same. Sounds quite minimal, but compounding over time will make quite a difference to the rate of escalation of DB pensions. 

It was quite widely expected that the RPI methodology would change about 7 or 8 years ago, but the head of the ONS came out against it for some reason and it got shelved.....caused a bit of stir in the linkers market then too, as I recall managing to do a couple of quite big inflation swaps for the large scheme I was involved with then just before the announcement and the pricing looked really good when the unexpected decision came out.....

xylophone

Discussed here last autumn.
https://www.lcp.uk.com/our-viewpoint/2019/09/rpi-changing-to-cpih-big-news-for-pensions/

MarkCarnage

Yes, it's been bubbling along for a number of years. Amused to see that the article above mentions that the ONS weren't happy with RPI, given that their boss was the one who effectively stopped the change last time round.
Still a lot of grumblings in the market from various parties. Main debate seems to be whether the changes should apply to existing linkers going forward, or only to newly issued ones. For a pension fund, they shouldn't really care too much provided that they too can use the new definition now in relation to benefit increases, although they would make a gain in that scenario by holding existing ILGs if the changes were confined to new issues. Fact is, the methodological flaw in RPI has been known about for a long time, so one can argue that the risk of it being reformed should be priced in (it is, to an extent, but not fully). 
It was one of the reasons why I held a global ex UK IL Bond fund rather than an ILG fund. Until recently, when I sold it all. 

Mick70

https://www.willistowerswatson.com/en-GB/Insights/2019/09/changes-to-RPI-planned-by-2030

Mick70

would also have impact on DB pensions as many have rpi annual rises