Three pension funds took the Treasury to the High Court over changes to the retail price index and yesterday they lost.
What this means to the schemes is that a lot of RPI linked gilts (linkers) will pay out less than the schemes had expected before the Treasury changed the rules.
The Treasury changed the rules because they felt they could and because the world has changed. As Reuters puts it , in reporting on yesterday’s ruling
RPI, which dates back to the 1940s and is regarded by official statisticians as inaccurate and obsolete, remains the benchmark for inflation-linked British government bonds that are commonly held by pension funds.
So the pension schemes will be worse off and the Treasury will be better off. It’s not just these big three schemes, it’s all the pension schemes that own “linkers” and that means less security for people in DB plans – not a lot less – but the change is significant. The security that members have is in the likes of BT, M&S and Ford picking up the tab for the downgrade in the value of their assets. The FT reports the scale of the tab as between £90-£100bn (over time).
But this is largely offset by the reduction to scheme liabilities where schemes are promising to pay RPI linked benefits. Where the promise to pay all of part of a pension is linked to RPI rather than CPI, then the changes are likely to mean pensions in payment from 2030 (when the changes come in ) will be lower. This will effect a large number of DB pensioners who are still alive after 2030.
A spokesperson for the pension schemes said this would impact “millions, especially women”, the argument being women live longer, I suspect however that the bulk of the pensioners are men and that (as we know from the pension gender gap) most men get bigger pensions because they are linked to salaries which are skewed in men’s favor.
Which is why I see the real losers in this as not the pensioners (who mainly have CPI linked pensions- with inflation linking capped at 5%) but the schemes, which have over- bought index linked gilts to cover all inflation linked liabilities. They are left with piles of downgraded paper which had previously been used to help cut surpluses.
Schemes couldn’t help buying RPI linkers because CPI linkers haven’t been issued, so some schemes feel they’ve been having to mis-buy the wrong kind of inflation linked bonds (for the want of better). They may feel that the Treasury has let it down twice, firstly by changing the rules of the game and secondly by forcing it to buy the wrong equipment.
The judge and the Treasury are saying “tough”. Judge Holgate’s ruling revolved around whether parliament had power to make changes mid-stream and this is what he said
“Parliament did not find it necessary to confer or spell out an express power to change the RPI. Given the history and nature of the RPI as an index measuring consumer price inflation, it is obviously implicit in the duty . . . to compile and maintain that index that the UKSA is able to change it,”
In short ,the judge is telling pension schemes they knew the risks and have benefited over the years by the RPI overstating real inflation and linkers over-paying pensions. The Treasury will feel that pension schemes have had it lucky too long and they’ll be pleased the gravy train hits the buffers in 8 years time. The UK Statistics Authority will feel vindicated (as statisticians don’t get it wrong). This is the UKSA’s boss staying away from the politics and the commercials and staying grounded in fact
“At a time of rising prices, it has never been more important to have accurate and trusted measures of inflation. We have been clear for a number of years that the Retail Prices Index is a very poor measure of inflation, at times greatly overestimating and at other times underestimating changes in consumer prices.”
I suspect it is the integrity of UKSA , as much as the primacy of parliament, that has swayed the judge.
Stand by for lots of actuarial and legal analysis and very little interest from the general public.
This is an important ruling, but it’s a backroom deal that’s more important than the public coverage it will get.
I’m interested to hear views of collateral impact , for instance on public pensions, benefits and state pensions.
Disclaimer – only an amateur’s view
There are many people who read my blog who know a lot more about this than me and I fully expect to stand corrected on some of my analysis.
But – dear readers – my job is partly to learn from my blog’s mistakes, so please be kind in your comments!
Thanks for highlighting the ruling Henry, all I would say is that the vast majority of our scheme members (including me!) are women with very small pensions as they were part time sales staff with fairly short service so this will impact, which was why we felt we had to participate in the case
It’s worth observing that the various inflation measures do produce materially different results, so the impact of change is actually rather large over time. Perhaps best illustrated by the latest numbers, which have RPI inflation running at 12.3% and CPI inflation at 10.1%. Also be aware that some in Government now favour moving to ONS’s CPIH index, which currently shows inflation at 8.8%. I will leave others to comment on the statistical merit of the three measures, I simply observe that they produce very different results which lead to very different cashflows for the people, schemes and investors affected. Adrian
I have fought shy of introducing all of this – but did (with help from Mike Harrison) write a blog on the ins and outs of RPI, CPI and CPIH. Layman’s work from me! https://henrytapper.com/2020/11/23/cpi-rpi-and-cpih-get-up-to-speed-pension-people/
As is typical, Henry blogged about something before most people had even seen the news item, a good read too. However, let’s look at the situation from a different perspective. There is no doubt that the switch from RPI to CPI will cost a huge amount, Con’s and my published estimate being £90 b, a “profit” (see below) for the taxpayers. Who actually bears that cost? So far as we can tell, the vast majority of ILGs are held by DB pension schemes or insurance companies with large pensioner portfolios.
Very few, if any, DC members will be affected. Including annuitants, payments to DB pensioners (current or future) are defined by formulae, not upon ILG returns. Individuals won’t be directly affected at all. In reality, the hugely significant financial pain will first be borne by pension schemes and then by their sponsors. Separately (link below), we have already written that ILGs have recently been poor investments, even before the switch from RPI to CPI.
Trustees who had already bought ILGs, which TPR has been pushing, will have assets of lower value than otherwise. There will be greater funding pressure, possibly over the very near term. The sponsors will be hit two-fold. First, the Trustees are going to be requesting higher contributions, which will be supported by TPR. Secondly, their accounts may be affected through the IAS19 standard, which would not be directly comparable to the funding valuation.
Although this looks like a win for the taxpayers, is it really? To the extent that investors feel spooked, they may be less willing to trust HMG in future. Simply put, investors did not expect a radical change in the index calculation method, which raises the question of whether this risk was adequately disclosed in the prospectus. Nearly 70 years ago, in the J Spurling Ltd v Bradshaw case (1956), Lord Justice Denning introduced his “red hand rule”, which would have been very useful to investors here– a red hand pointing to the relevant clause on the face of the prospectus.
It will be surprising if the judgment is not appealed. Where that will lead, we have no idea. In the meantime, there will continue to be a high degree of unwelcome uncertainty.
I am a very long way away from this but as I understand it, the calculation of RPI will be that of CPIH, not CPI. If I am wrong, perhaps someone would be kibd enough to correct me.
It is easy to exaggerate the effects of the change on pensioners – most in fact only benefit from limited price inflation, with their benefits capped, increasing only at 2.5% or 5% at maximum, so it is only those periods when RPI has been below that limit rate where members stand to lose and then the difference, their loss, has historically been quite small – 0.72% pa.
History tells us that the government filch the pensioner every time! They have the power to ‘do what they like’ – no consultation – no indexing for those in the FAS who do not get either RPI or CPI. If we got what we paid for the maximum would of been 3% maximum in most schemes. There really is no ‘equality anywhere’ – especially for women!