Inclusion of housing costs in inflation could be bad news for pensions, says expert

Responding to a report by the UK Statistics Authority, John Pullinger said that the Office of National Statistics (UKSA) intended to allocate "sufficient resource" to have the measure re-accredited as a 'national statistic' within six months. CPIH lost national statistic status in 2014, and the UKSA still has major concerns about its "credibility" and user confidence in the measure, according to its recent report.

In his letter to the UKSA, Pullinger said that the re-accreditation of CPIH as a national statistic was the "top priority" of the ONS.

"I consider that it is important that a measure of owner occupiers' housing costs is included in the measure we make the focal point of our commentary," he said.

"I also consider that it is important that we focus on a measure that can continue to be developed to meet the needs of UK users without being constrained by international regulations - although we will also continue to produce such measures and others which form part of the same 'family' of statistics," he said.

Pullinger also used the letter to criticise another commonly-used measure of inflation, the retail price index (RPI), as "not a good measure of inflation" and one that did not "realistically have the potential to become one". Many private sector defined benefit (DB) pension schemes and commercial leases incorporated RPI-linked increases, and the measure is still used in annual regulated rail fare increases and a significant percentage of government bonds.

The ONS has continued to publish CPIH since it lost its designation as a national statistic, along with the more commonly-used CPI and RPI and RPIJ, an amended measure of the RPI. CPI is the main measure of UK inflation and is used to uprate the likes of public sector pensions and state benefits.

In his letter, Pullinger said that the ONS intended to publish "the minimum of PRI-related data necessary to ensure the critical and essential needs of existing users are met" from the start of 2017, by which point its focus would be on CPIH and the CPI. This would mean that RPIJ would no longer be published, he said.

The ONS also plans to develop a new 'household inflation index' (HII) to measure changes in payments for goods and services, Pullinger said. This measure would be "fundamentally different" to traditional indices as it would potentially reflect asset prices and interest payments, and give the expenditure of every household equal weighting. The ONS intends to publish its proposals and a timetable for the development of the new measure in July, Pullinger said.

CPIH does not measure house prices or mortgage payments, but instead attempts to estimate what it would cost homeowners to rent their own home. The UKSA is concerned about the quality of the private rental data sources used by the ONS, and has said that the ONS must do more to monitor how the measure behaves over time and better explain the concepts and methods behind CPIH before it can be reaccredited as a national statistic.

Pensions law expert Stephen Scholefield of Pinsent Masons, the law firm behind Out-Law.com, said that the potential reaccreditation of CPIH as a national statistic could "lead to pressure for this to be adopted as the appropriate measure for statutory pension inflation proofing".

"This would be bad news for employers, as it would make scheme benefits more expensive to provide," he said.

"The proposal to cease publishing RPIJ will come as bad news for those schemes that may have been considering adopting this in place of RPI, although this is quite rare," he added.