Jonathan Smith, UK Strategic Solutions, Schroders comments:
"The Consumer Prices Advisory Committee (CPAC) has been looking into whether the RPI and CPI calculation methodologies should be brought more into line. Although no clear decision has been made, CPAC has published details of a consultation on a number of options which, if implemented, could significantly reduce the level of RPI relative to CPI (the so called RPI CPI "wedge").
"These changes could have a material impact on UK pension schemes. However, we note that even if CPAC were to recommend changes to the RPI calculation methodology, there remain a number of hurdles that would need to be overcome before the changes could come into effect."
Options for change
As discussed in our June article (schrd.rs/Ul1aAu) broadly speaking, there are two elements to the RPI CPI wedge:
The composition of the RPI basket of goods compared to the CPI basket
How the RPI figure is calculated compared to the CPI figure - often called the ‘formula effect'
CPAC is focussing on the latter of these two effects. CPAC's consultation will ask users of the RPI measure for their views on four options for changing the RPI calculation methodology. The first is no change; the remaining three will eliminate the formula effect to varying degrees. The fourth option is to change RPI so that its formulae fully align with CPI. Estimates of the impact of these changes vary; however most calculate the impact to be between 0.25% and 1%, depending on the option chosen.
Timetable
CPAC has set out the following timetable:
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8 October 2012 - The National Statistician will publish a consultation document to invite users' views on the way RPI is calculated
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30 November 2012 - The consultation will close
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January 2013 - CPAC will publish their recommendations
The Bank of England will then be consulted on whether the proposal would be a fundamental change to the calculation of RPI and whether this would be ‘materially detrimental' to index-linked gilt holders
If the Bank's view is that the proposed change to RPI constitutes a fundamental change that is materially detrimental to index-linked gilt holders, then the agreement of the Chancellor of the Exchequer would be required
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19 March 2013 - Any change to RPI will be published by the Office for National Statistics
To view the full article click here: schrd.rs/VgrY7b
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