The UK government could be forced to pay a £40bn compensation bill if a legal challenge launched on Tuesday over the recalibration of the retail prices index (RPI) is successful, the Times newspaper reported.
The BT, Marks & Spencer and Ford UK pension schemes today begin their challenge to Finance Minister Rishi Sunak in the Royal Courts of Justice.
In 2020 Sunak said he was changing the definition of the RPI after a request from the UK Statistics Authority to make it identical to CPIH, the consumer prices index adjusted for housing costs, with the change coming in from 2030.
RPI has long been discredited as a measure of the cost of living because of a methodological flaw in the way it is calculated and other drawbacks. It typically comes in at around 0.8-1 percentage point higher than CPIH each year.
However investors in inflation-protected bonds, known as linkers, say that is irrelevant and that they bought the bonds – whose interest rate is determined by RPI – on the reasonable expectation that the terms would not be changed, the newspaper stated.
Ian Mills, a partner at actuaries Barnett Waddingham, said, the challenge was not expected to succeed, but if it did it could push up the cost of government borrowing and destabilise the gilts market. It could also give a large boost to linker holders as well as to people whose pension increases are linked to RPI.
“If compensation is paid then this would significantly improve pension scheme funding levels, but at a colossal cost to the taxpayer – the compensation figure could be greater than the UK’s annual defence budget.”
Many linkers are very long-dated, only maturing decades into the future, so their value has already been severely hit by the proposed change. Insight Investment has put the total cost to investors at as much as £100bn.
The BT scheme, which has 275,000 members, has previously calculated it would be £1bn worse off because of the formula change.
The case is expected to last two days. A judgment is not expected before September.