Frank Field has called into question the practice of measuring defined benefit pension scheme liabilities using the retail price index (RPI). The chair of the Work and Pensions Committee has written to the Office for National Statistics (ONS) to ask them to consider whether the use of the retail price index is still adequate and fit for purpose.
Whether the retail price index is used or the consumer price index (CPI) can result in a 5-10% difference in a scheme's liabilities according to recent estimates from The Pensions Regulator. Thanks to a green paper that was published by the Department of Work and Pensions (DWP) back in February, it is known that the retail price index is used as an official measure of inflation in around 75% of cases.
Field said that back in March 2016, the national statistician at the Office for National Statistics, John Pullinger said that the Retail Price Index is not a good measure of inflation and does not realistically have the potential to become one. His exact statement back in March 2016 was:
"Put simply, I believe that the RPI is not a good measure of inflation and does not realistically have the potential to become one. I strongly discourage the use of RPI for as a measure of inflation as there are far superior alternatives."
The RPI over time has tended to grow faster than the CPI but since 2010 however, it has done so much more and is attributed to the way in which clothing prices are incorporated in the indices.
The Difference Between The CPI And The RPI
Both the CPI and the RPI measure inflation and both of them do it by taking a basket of goods that include things like food, clothing and petrol and look what they cost last year, compare it to what they cost now thus finding the proportional difference. However, the CPI leaves the costs of housing out of the basket so rises in mortgage payments, rents, and council tax, which in real life you pay, don't get reflected in it. The RPI does take account of those costs.