The Office for National Statistics (ONS) recommendation to keep the retail price index (RPI) as a measure of inflation, but that a co-existing alternative version of RPI, called the RPIJ, be created to tackle the ‘flaws’ in the current RPI formula has received mixed views from the pensions industry.

Announcing the results of its consultation, which explored the need to address the gap between the RPI and the Consumer Price Index (CPI), ONS national statistician Jil Matheson announced that RPI gives ‘significant value’ to pensioners and investors and should therefore remain unchanged. This will mean increases to index-linked gilts and RPI- linked pensions will be preserved.

However, the statistician also recognised a significant flaw with the formula used to produce RPI, stating that it fails to meet ‘international standards’.

As a result, Matheson recommended the creation of a new index known as RPIJ, which will see a move away from the existing arithmetic Carli index formula to geometric formula Jevons.

While the announcement may be welcome news for pensioners who will see current benefits preserved, the introduction of the RPIJ has been met with scepticism among some pension professionals.

Broadstone actuarial director John Broome Saunders claims that trustees will be forced to choose between RPI and RPIJ: “Schemes which explicitly link pension increases to the retail price index may have been able to resist moving to the consumer price index on the basis of name alone.

“We now have old RPI and new RPI – which will force trustees to choose either new RPI, which will lead to lower benefits for members, or old RPI, which the ONS has all but admitted is flawed.”

However Punter Southall head of inflation research Sarah Brown stressed that it is unclear whether employers would start linking pension schemes to the new RPIJ, but warns that such a move would result in benefits to pensioners being curbed.

“It isn’t impossible that pension schemes could be linked to the new RPIJ but this would not be straightforward to implement.

“However, if pensions are linked to the RPIJ, we would expect pensioners to get lower benefits, which will in turn correspond to a reduction in pension deficit.

“There is precedent in retrospect with the move to CPI but at the moment there’s nothing to suggest that this will be the case.”

The consultancy firm’s technical director Joanne Livingstone added that keeping the RPI could mean inflation expectations are now likely to rise ‘pushing up liabilities and deficits’. But the National Association of Pension Funds said that while changes to RPI could reduce liabilities, it would also have cut the growth in pensions paid to former workers.

The UK Statistics Authority has accepted these recommendations and the new RPIJ is due to be published this March.

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