RPI reform: the impact on LGPS fund valuation assumptions

On 25 November 2020, the Chancellor responded to the consultation on the reform of RPI, confirming that he will not provide consent for reform prior to 2030, meaning that the proposed alignment of RPI to CPIH will take effect from 2030 at the earliest.

It is expected that RPI will be on average 1% p.a. lower than otherwise from 2030 as a result. Although the majority of LGPS benefits are linked to CPI inflation rather than RPI inflation, we derive our assumption for future CPI inflation from market implied RPI inflation and therefore need to consider how the impact of this announcement and the planned reform of RPI affects your fund’s valuation assumptions.

As part of the consultation response, the Treasury also confirmed that investors will not be compensated for the expected reduction in post-2030 coupon payments, meaning the change in RPI is expected to reduce the payments due from RPI linked investments from 2030, such as index-linked gilts (ILGs). This will also need to be taken into account by Funds that hold these assets.

For further information please download our briefing note below.