RPI: Still fit for purpose

The RPI has recently been subjected to a sustained bout of unfair criticism from politicians and commentators. Despite this, the judge in the recent BT pensions case deemed that the RPI had not “become inappropriate” and that BT had no grounds for moving a group of their pensioners to the CPI which gives generally lower upratings. The RPI is, therefore, still fit for purpose. This was a relief to me – I was the expert witness arguing in favour of the RPI – if not a surprise. The full story as to how we got to the situation where so many people (mostly, it must be said, economists and the powerful and self-interested trying to cut their costs) are doing the RPI down is yet to be told. The decision was important for the pensioners as their incomes would not be unjustifiably cut. It was also a good day for common sense, and for the RPI, one of the country’s longest-standing, most trusted and widely-used statistics. The Thales and BT rulings taken together provide food for thought for those who continue to damage the reputation of the RPI without looking beyond the mantras and sloppy headlines. 

Background: I was the expert witness for the BT pensioners (against BT). The hearing took place between 8 & 13 December 2017 in the Chancery Division of the Royal Courts of Justice. The solicitors that engaged me were Stephenson Harwood (see their comment on the case) and the barristers were Wilberforce (see their news story on the day of the judgment, 19 January 2018). Click to read the judgment. This blog summarises the BT case – future blogs will deal with some of the substantive issues. The key wording of the scheme is set out in Appendix 1. Some background to the general trend of pension fund switches from RPI to CPI is in Appendix 2. Key sections from the judgment (which was more than  30,000 words, over 235 paragraphs and 60+ pages) are found in full in Appendix 3.

BT has a number of pension schemes. Members of one see their pensions uprated by the Retail Prices Index (RPI). To cut their costs BT want convert the pension uprating to the Consumer Price Index (CPI) which is typically one percentage point lower. BT had to make the case that RPI had “become inappropriate” and had been “so amended as to invalidate it ….. as a continuous basis for purposes of calculating increases”. The nature of the wording meant that this case was important to the future of the RPI. In essence, to use words more familiar to the world of statistics, the case would determine whether RPI  remained a continuos, valid series that was fit for purpose.

In essence, the judge concluded that the issues raised by BT (individually or in aggregate) did not support the case that RPI had “become inappropriate”. There seemed to be two central themes. First, the key factors which “underlie all of the matters relied on by BT” (namely the use of the Carli formula and its tendency to deliver a higher figure than a geometric mean) were present, and known to be present, in RPI in 2002 (albeit that the formula effect has worsened and the perception of those flaws has hardened). Hence, even if you thought that RPI was inappropriate, it had been for a very long time and had not become inappropriate.  Second, a switch could leave pensioners without protection against increases in “the real cost of living to which they are likely to be subjected”.

There were several lines of argument pursued by BT and each is discussed below.

On the clothing change (a change to the collection of prices in 2010, from paragraph 191) the judge said it had not caused RPI to become inappropriate for two reasons. First, the way the various formulae behave (notably the differences between Carli and Jevons) had been known about for years and, importantly in this case, before 2002. The latest clothing change had just increased the size of the so-called formula effect. The judge also noted that to switch from RPI to CPI would remove that part of the formula effect that had, in effect, “always been present”. Second, that RPI remained a National Statistic, and continued to have widespread support (as shown by the responses to the consultation in 2012) for some time after the change in 2010. Had this been a major concern, the de-designation would have occurred more rapidly.

On “the freeze” (the decision to keep the formulation of the RPI in broadly its current shape, from paragraph 194) the judge also said that it did not cause RPI to become inappropriate. He noted that the freeze did not prevent RPI from remaining “fit for purpose” and that the index continued to be widely used for legacy purposes. These legacy purposes were those for which RPI’s fitness was to be maintained. And, of course, the fact of the freeze has not so far caused any change – or caused a desired change not to be made. The judge concluded that the so-called reiteration of the ‘freeze’ in 2016 cannot – if the original imposition had not rendered RPI inappropriate as from 2013 – render it inappropriate from 2016. If anything, he said there was a minor relaxation (in the freezing) to the extent that it made clear that methodological changes would continue to be made, if necessary so as to improve CPI/CPIH.

It was also noted that the “negative qualities” of RPI (its use of the Carli formula which is the primary source of the formula effect and is unfashionable under existing “international standards”) were for years known to be attributes of RPI, and thus not matters which can be said to have caused RPI to become inappropriate since 2002.

The judge did not consider that the views of the ONS amounted to “a conclusion that it was inappropriate for RPI to continue to be used in the legacy contexts where it was already in use.” It might be that the advice would dissuade people from using the RPI in the case of new uses but legacy uses are explicitly expected.

The introduction and subsequent abandonment of RPIJ was dismissed swiftly by the judge as being irrelevant to the case (paragraphs 199 to 201). The judge said that given “…… neither the fact of, nor the reasons for, the ‘freeze’ caused RPI to become inappropriate ….. the mere fact that RPIJ was introduced as an alternative cannot …. cause RPI to have become inappropriate. The most that could be said is that RPIJ was a more appropriate index than RPI.” He added that the “subsequent abandonment” of RPIJ did not cause RPI to become inappropriate.

The de-designation of RPI as a National Statistic (paragraph 202) was “not sufficient to cause RPI to become inappropriate ….. albeit such a decision by the UK authority charged with oversight of statistics is a very important factor in considering the appropriateness, generally speaking, of RPI as a measure of inflation.” Importantly, the judge said that the “continued publication by the UKSA and its maintenance for the express purpose of ensuring it remains “fit for purpose” preclude the conclusion that it has become – by reason of its de-designation as a National Statistic alone – inappropriate (i.e. unfit for purpose) for the legacy purposes for which it is being maintained.”

The cumulative effect of the matters relied on. (Paragraph 203 to 205) The judge said that there was “considerable force in the proposition” that RPI is “now to be considered inappropriate as a measure of inflation”. He identified: (1) as a result of the clothing change, the formula effect has nearly doubled; (2) it fails internationally recognised tests; (3) it has, as a result, been de-designated as a National Statistic; (4) the UK authorities charged with oversight of statistics have publicly described it as a flawed measure of inflation and strongly discouraged its use; and (5) it is in the process of being replaced by CPI in a number of contexts.”

Yet, while acknowledging that it “may well be true that it would be inappropriate to use RPI if starting from scratch ….. it does not necessarily follow that RPI has “become inappropriate” for the purposes of uprating pensions”. He considered two factors were important. First, that the factors which “underlie all of the matters relied on by BT” were present, and known to be present, in RPI in 2002 (albeit that the formula effect has worsened and the perception of those flaws has hardened). Second, the purpose of the pension is to provide protection for pensioners against increases in “the real cost of living to which they are likely to be subjected”.

Presence of flaws in RPI in 2002 (Paragraph 206 to 208)

The judge noted that two “flaws” (I’d say “features”) in RPI underlie each of the matters that are relied on by UKSA, the ONS and most of the commentators who consider it to be inappropriate. These are (1) that it uses the Carli formula which does not comply with internationally recognised standards; and (2) that it contains an upward bias, as a result of using the Carli formula, compared to CPI or other indices using the Jevons formula.

These are flaws, however, which pre-date the first introduction of the relevant wording, in the 2002 Rules (and updated in 2016). As acknowledged, in cross-examination, the criticisms which are made of RPI, could have been made equally in 2002, albeit that the extent of the ‘overstatement’ was increased as a result of the clothing changes in 2010. The fact that RPI failed the axiomatic test had been known for a long time, and certainly since before 2002. The RPI must have been taken to have been appropriate then, cannot, as a result, have become “inappropriate” since then.

Providing protection against increases in the cost of living (Paragraph 209 to 218)

The judge said that in considering the concept of “appropriateness” it is legitimate to have regard to “purpose”. In particular, he felt that it would be “an important factor against concluding that RPI has become inappropriate if jettisoning RPI would introduce a material risk that increases in pensions would not keep rate with increases in the cost of living likely to be experienced by the relevant pensioners.” He concluded that “there are reasonable grounds to conclude that jettisoning RPI would lead to such a material risk for the pensioners under the Scheme.”

The judge acknowledged that inflation is a latent variable and that “it is impossible to say that RPI is wrong and CPI is right, or even that RPI is more wrong (or right) than CPI, as an estimate of the likely increase in cost of living for pensioners.” While accepting that, of course, an arithmetic mean always gives a higher (or equal) estimate to its geometric counterpart, he said that “it is common ground that there is no established correlation between the fact that Carli fails certain of the axioms, and the extent of the formula effect.”

Second, he highlighted examples (in my reports, including papers from Dr Altmann, the Rowntree Foundation, Donald Hirsch and the RSS) that showed that there is “convincing evidence” that there are certain respects in which CPI might be said to underestimate inflation (albeit probably to a lesser extent) as well as respects in which RPI might be said to overestimate it, and that in some instances pensioners are likely to be particularly affected.

Third, he said that it is “significant” that RPI “continues to be used in a number of contexts related to outgoings of large sections of the population”, including in many contexts dictated by government, or national regulator policy. He also noted that the “conclusion by the UKSA, ONS and National Statistician that RPI ought not to be used at all is not determinative of the question whether it is now inappropriate to use it for uprating pensions under the Scheme, in light of the reality of its continued use in a number of other contexts.”

The judge did accept that “at some point in time the state of the general consensus as to RPI and the extent to which it is no longer used elsewhere will render it inappropriate for use in the 2016 Scheme.” Adding that “the identification of the tipping point from appropriate to inappropriate, along a continuum of change, is a highly fact-sensitive judgment call.”

The judge concluded (in paragraph 219) “Having regard to the totality of the matters relied on by BT and the second Defendant as demonstrating, respectively, the disadvantages and merits of RPI, notwithstanding the powerful statements from the UKSA, ONS and others to the effect that RPI is flawed and that it ought not to be used as a measure of inflation, I have reached the conclusion for the above reasons that RPI has not at this time “become inappropriate” for the purposes of uprating pensions.”

 

Appendix 1

Key wording underlying the case

The relevant BT pension scheme says (paragraph 8) that:

“each pension in payment ….. will be increased by the increase in the cost of living during the 12 months up to and including the previous January ….. The cost of living will be measured by the Government’s published General (All Items) Index of Retail Prices or if this ceases to be published or becomes inappropriate, such other measure as the Principal Company, in consultation with the Trustees, decides.”

There was also a relevant definition in sub-rule (3), which said:

“(3) Changes to the General Index. If the General Index ceases to be published, or is so amended as to invalidate it in the view of the Principal Company as a continuous basis for purposes of calculating increases, the Principal Company shall substitute such other index or appropriate basis of comparison as it shall in consultation with the Trustees decide.”

 

Appendix 2

Precedents

In 2010, the Government announced that occupational pensions legislation would use the Consumer Prices Index (CPI), instead of RPI, for pensions uprating. However, we are still seeing new Court decisions over when schemes are able to make such a switch. Some schemes have switched, others cannot but some are marginal, with much depending on the so-called “drafting lottery” which allows more or less freedom to scheme managers.

We know from the case law that where scheme rules permit a switch to CPI, companies or trustees can change the index used, going forward, without breaching member’s subsisting rights. We also know that trustees will often be able to defend member complaints based on previous communications. Nevertheless, the difference in outcome between decisions shows that much can turn on how rules definitions are framed (some have RPI hard-wired into them), and the precise ‘official’ status of RPI at any time.

Often the legal rulings have little impact on the wider debate in statistical circles about the relative merits of RPI v CPI debate but sometimes they do. Earlier in 2017, there was a case involving the pension scheme of Thales. That case was also concerned with the interpretation of a “gateway” provision allowing RPI to be replaced for the purposes of indexing pensions. In that case, the question was whether the compilation of RPI had been “materially changed”.

The Court decided that the effect of a change was not relevant to the question of whether or not the change in the compilation could be considered to be material. Routine adjustments in the compilation of the RPI were considered to be “an inherent aspect of its maintenance as an index which is fit for purpose”. The Court therefore held that a routine change could not become a material change simply because it had a significant impact on the value of the index.

The Court then considered whether the change in the housing components of RPI constituted a material change. Previously, the housing cost component of RPI was measured using the House Prices Index (“HPI”). However, the ONS has started publishing a new house price index (“UK HPI”), and a version of this was to be used in future calculations for RPI. It was concluded that the introduction of UK HPI did result in a material change to the compilation of the RPI.

This being the case, the company was required to determine the nearest alternative index. It was agreed that “the nearest alternative index must be the one which most closely reflects the existing elements of the RPI”. The judge did not consider that RPI as altered by the relevant material change in compilation should automatically be excluded as a candidate. As it remains a published index, he concluded that RPI following the introduction of UK HPI was “the nearest alternative index”. He did “not consider that the Company could reasonably adopt any other index.”

 

Appendix 3

Key passages and quotes from the judgement

I do not necessarily agree with all the comments in the ruling and believe there are a small number of inaccuracies, for example, in how the formula effect can be measured.

Precedents

As discussed in Appendix 2, there was a similar case involving the pension scheme of Thales. The judge in the BT case did not consider that to be of “any assistance” in this case as the wording was different. (Paragraph 97.)

The meaning of “becomes inappropriate”

The judge considered this at length (paragraphs 86 to 98) and concluded:

” ….. in order for RPI to have “become inappropriate” two things must be satisfied. First, that RPI is now in fact inappropriate (and not merely less appropriate than any alternative index) for the purposes of calculating increases in pensions payable to members of the Scheme to reflect the inflation experienced by those members and, second, that this constitutes a change since 2002.”

The “RPI and CPI – similarities and differences” is discussed in paragraphs 105 to 109. The formula effect, in effect the consequence of using the geometric as opposed to the arithmetic mean is discussed in paragraphs 110 to 116. The impact of changes to clothing price collection is discussed in paragraphs 117 to 119.

Limitations on the expert evidence (Paragraphs 120 to 127)

The judge took the view that there were “important limitations on the usefulness of the expert evidence”. The first reason was that “much of the expert evidence was directed at the respective merits and disadvantages of RPI, as compared to other indices, in particular CPI”, rather than focusing on aspects of RPI or CPI which were relied on by BT as demonstrating that RPI has become inappropriate. The second limitation on the expert evidence was “the extent to which (the experts) engaged with the ultimate question, that is whether RPI has become inappropriate.” He added: “I do not criticise either expert for this, as they were specifically requested to do so in the knowledge that the question was not one for them but for the court.” (It is worth recording that in this case, the BT report was produced first, to which I then responded.)

On my time in court, and the exchanges with the BT barrister, the judge concluded: “The fact that (SB) disagrees with other reputable experts emphasises that this is an area on which such experts disagree ……. (and) …… insofar as Mr Briscoe exhibited a reluctance to agree with one or other interpretation of certain documents, the documents speak for themselves and the interpretation of them by the experts does not add materially to the relevant evidence.” Ultimately it seemed that not much of that mattered.

The judge’s conclusions (From paragraph 191)

The clothing change 

The judge said that the 2010 clothing change: “….. had a significant impact on the formula effect, and is an important factor to take into account when considering the cumulative effect of the seven matters relied on by BT. In itself, however, I do not regard it as having caused RPI to become inappropriate, for two main reasons. The first ….. that the formula effect, and the “upward bias” had been known factors in RPI in 2002. RPI was not inappropriate for the purposes of the 2016 Rule before the clothing change, and the only impact of the clothing change was to increase, in percentage terms, the formula effect. This is an instance where, in my judgment, it is relevant to consider the impact on the protection for pensioners if RPI was replaced by any other index. In particular, given that any other index would remove not only that part of the upward bias introduced by the clothing change, but the whole of the upward bias (already running at an average of 0.5%) which had always been present, that would deprive the pensioners of an important element of protection which opting for the index with in-built upward bias gave them. The second reason is that RPI remained a National Statistic, and continued to have widespread support (as shown by the responses to the consultation in 2012) for some time after 2010.”

The “freeze” (from paragraph 194)

The judge said: ” ….. the imposition of the freeze in 2013 did not cause RPI to become inappropriate for the purposes of calculating pension increases under the Scheme. As was made clear in the March 2016 announcement, the freeze did not prevent RPI from remaining “fit for purpose”. That announcement also recognised that RPI continued to be widely used for legacy purposes. The legacy uses of RPI included its widespread use in private pension schemes ….. These legacy purposes were those for which RPI’s fitness was to be maintained. As Mr Johnson accepts, the imposition of the freeze has not so far caused any change. His concerns as to possible future uncertainty are met, in my judgment, by the fact that the UKSA is committed to ensuring that RPI remains fit for purpose, as well as by the fact that, if by reason of its inability to change, RPI in the future becomes inappropriate, then any decision made now does not inhibit a different conclusion being reached then.” (Paragraph 196)

“The UKSA’s and ONS’s reasons for the imposition of the freeze do not detract from this conclusion. The ONS’s paper of January 2013 notes – as the negative qualities of RPI – that it is its use of Carli which is the primary source of the formula effect, and that Carli does not meet current international standards. These were matters that were known to be attributes of RPI in 2002, and thus not matters which can be said to have caused RPI to become inappropriate since 2002. In any event, the essential conclusion of the ONS was to reject the proposals for change, in large part because … Carli’s properties are well understood and there is significant value to users in continuity of the RPI’s long time series.” This was expanded upon (at p.11 of the ONS paper), as follows: “…. the respondents’ views, that the properties of the Carli are known and have been used in the construction of the RPI since its creation are also pertinent, especially in the context of the Code of Practice for Official Statistics.” At paragraph 28, the “weight of users’ requirements and the desire for continuity” were cited as reasons militating against change. While the ONS (1) stated that it would not advocate the use of Carli in the construction of a price increase index if it were starting from scratch, (2) recognised there were counterbalancing arguments for change, and (3) noted that “[t]he RPI’s continued use should be reassessed by users, and other indices that are closer to international best standards should be considered as alternatives”, I do not consider that the views of the ONS, derived from the paper as a whole, constituted a conclusion that it was inappropriate for RPI to continue to be used in the legacy contexts where it was already in use.”(Paragraph 197)

“The reiteration of the ‘freeze’ in 2016 cannot – if the original imposition had not rendered RPI inappropriate as from 2013 – render it inappropriate from 2016. There was no substantive worsening of the ‘freeze’. If anything, there was a minor relaxation to the extent that it made clear that methodological changes would continue to be made, if necessary so as to improve CPI/CPIH.” (Paragraph 198)

The introduction and subsequent abandonment of RPIJ (Paragraphs 199 to 201)

“Given my conclusion that neither the fact of, nor the reasons for, the ‘freeze’ caused RPI to become inappropriate for the purpose of calculating pension increases under the Scheme, the mere fact that RPIJ was introduced as an alternative cannot, in my judgment, cause RPI to have become inappropriate. The most that could be said is that RPIJ was a more appropriate index than RPI. That, however, fails to meet the threshold set out in the gateway.”

“Similarly, the subsequent abandonment of RPIJ did not cause RPI to become inappropriate. The reasons for its abandonment included that it was little used, and that it appeared to lead to confusion.”

“While it was also noted that RPIJ shared the weaknesses of RPI that went beyond use of the Carli formula, such as population coverage and use of a direct measure of house prices to estimate owner occupiers’ housing costs, these are not factors relied on by BT as causing RPI to have become inappropriate for the purposes of calculating increases in pensions.”

The de-designation of RPI as a National Statistic (Paragraph 202)

“The fact, taken alone, that RPI was de-designated as a National Statistic is not sufficient, in my judgment, to cause RPI to become inappropriate for the purposes of calculating pension increases under the Scheme, albeit such a decision by the UK authority charged with oversight of statistics is a very important factor in considering the appropriateness, generally speaking, of RPI as a measure of inflation. There is some textual support for this conclusion in the wording of the 2016 Rule, in that the first gateway comprises two elements: that RPI is no longer published, or that it has become inappropriate. The fact that the first element is cessation of publication altogether, and not merely that it ceases to be published as a National Statistic suggests that while loss of National Statistic status may well be a factor when considering whether it has become inappropriate, loss of such status is not in itself determinative of that question. Moreover, for reasons similar to those I have set out above in relation to the ‘freeze’ on RPI, its continued publication by the UKSA and its maintenance for the express purpose of ensuring it remains “fit for purpose” preclude the conclusion that it has become – by reason of its de-designation as a National Statistic alone – inappropriate (i.e. unfit for purpose) for the legacy purposes for which it is being maintained.”

The cumulative effect of the matters relied on (Paragraphs 203 to 205)

“There is considerable force in the proposition that, having regard to all seven of the matters relied on by BT, RPI is now to be considered inappropriate as a measure of inflation given in particular that: (1) as a result of the clothing change, the formula effect has nearly doubled; (2) it fails internationally recognised tests; (3) it has, as a result, been de-designated as a National Statistic; (4) the UK authorities charged with oversight of statistics have publicly described it as a flawed measure of inflation and strongly discouraged its use; and (5) it is in the process of being replaced by CPI in a number of contexts.”

“The question I have to determine, however, is not whether RPI is inappropriate, generally speaking, as a measure of inflation, but whether it is inappropriate specifically for the purpose of uprating pensions within the meaning of the 2016 Rule. Similar to the analysis undertaken by the ONS when determining to retain the Carli formula in RPI in January 2013, while it may well be true that it would be inappropriate to use RPI if starting from scratch, for example in a pension scheme created today, it does not necessarily follow that RPI has “become inappropriate” for the purposes of uprating pensions in the Scheme. In this context, I consider that two factors are particularly important: first, the flaws which underlie all of the matters relied on by BT were present, and known to be present, in RPI in 2002, albeit that the formula effect has worsened, and the perception of those flaws has hardened, in the intervening years; and second, the purpose of the 2016 Rule is to provide protection for pensioners against increases in the real cost of living to which they are likely to be subjected.”

Presence of flaws in RPI in 2002 (Paragraphs 206 to 208)

“The flaws in RPI that are relied on by the UKSA, the ONS and most of the commentators, including Mr Johnson, who consider it to be inappropriate are (1) the fact that it uses the Carli formula which does not comply with internationally recognised standards; and (2) the fact that it contains an upward bias, as a result of using the Carli formula, compared to CPI or other indices using the Jevons formula. It is these two flaws that underlie each of the seven matters listed above that are relied on by BT.”

“These are flaws which pre-date the first introduction of the relevant wording, in the 2002 Rules. As noted above, in the HM Treasury document published in December 2003, the formula effect was identified as having contributed approximately 0.5% to the gap between CPI and RPIX since 1997. Similarly, David Fenwick’s 1999 paper for the ONS referred to the formula effect as a known quantity, commented on the fact that a formula based on a geometric mean would always produce a lower number than that based on an arithmetic mean, noted that the formula effect was particularly pronounced for clothing, and noted that the introduction of broader item descriptions in 1996 contributed to the formula effect. Mr Johnson, in cross-examination, acknowledged that the criticisms which he makes of RPI, including that it ‘overstated’ inflation by a percentage point a year could have been made equally in 2002, albeit that the extent of the ‘overstatement’ was increased as a result of the clothing changes in 2010. He also acknowledged that the fact that RPI failed the axiomatic test had been known for a long time, and certainly in 2002.”

“Two consequences follow, in my judgment, from this. First, the starting point for considering whether RPI has become inappropriate within the meaning of the 2016 Rule is that RPI must be taken to have been appropriate, for the purposes of calculating increases in pensions payable under the Scheme, notwithstanding the fact that RPI is based on a formula that failed parts of the axiomatic tests and that it produced a headline number for inflation that was 0.5% higher than CPI. Second, the drafter of the 2016 Rule has opted, in the knowledge that CPI produced a lower rate of inflation, to identify as the default index for increasing pension payments, an index which (by reason of the formula on which it is based) produced a higher rate of inflation than an index based on a different formula, in particular CPI. Members therefore had the protection of an index known to have built into it the same upward bias which is the main focus of the current objection to RPI.”

Purpose of 2016 Rule to provide protection against increases in the real cost of living likely to be encountered by pensioners (Paragraphs 209 to 218)

“While I acknowledge the limitations in an appeal in the abstract to the purpose of an uprating provision being to protect pensioners, nevertheless in considering the concept of “appropriateness” it is in my judgment legitimate to have regard to that purpose. In particular, it would be an important factor against concluding that RPI has become inappropriate if jettisoning RPI would introduce a material risk that increases in pensions would not keep rate with increases in the cost of living likely to be experienced by the relevant pensioners. This is particularly so taking into account that the pension is likely to constitute the principal, if not the sole, source of income for the relevant pensioners.”

“….. I consider that there are reasonable grounds to conclude that jettisoning RPI would lead to such a material risk for the pensioners under the Scheme.”

“First, as is common ground, inflation is a latent variable, and any index can do no more than provide an estimate of the increase in cost of living as experienced by any given household, or even type of household. Thus, it is impossible to say that RPI is wrong and CPI is right, or even that RPI is more wrong (or right) than CPI, as an estimate of the likely increase in cost of living for pensioners under the Scheme.”

“Mr Johnson, while accepting that this is so, says nevertheless that “if you know there is a problem in the construction of an index in the way that the Carli creates biases, then whilst you might not know the right answer, you do know that you are trying to get there in the wrong way.” This is, however, not a complete answer to the latent variable point, since it is common ground that there is no established correlation between the fact that Carli fails certain of the axioms, and the extent of the formula effect.”

“Second, there is convincing evidence (see, for example, the papers cited from Dr Altmann, the Rowntree Foundation, Donald Hirsch and the RSS) to support Mr Briscoe’s conclusion that there are certain respects in which CPI might be said to underestimate inflation (albeit probably to a lesser extent) as well as respects in which RPI might be said to overestimate it, and that in some instances pensioners are likely to be particularly affected. ….. As I have noted in connection with the clothing change, a consequence of replacing RPI by an index based on Jevons would wholly remove the upward bias, a substantial part of which was inherent in RPI on its adoption as the default index in 2002.”

“Third, it is significant in my judgment that RPI continues to be used in a number of contexts related to outgoings of large sections of the population, including in many contexts dictated by government, or national regulator policy. I accept that the weight of opinion, based on the materials I have been shown, supports the view both that (a) the lack of consistency between the use of RPI for outgoings, as compared to income, is regrettable and (b) the single measure of inflation that should be used for both sides of the balance sheet is something other than RPI (probably CPI, or a variant of it). I also accept that to the extent that items which have increased by reference to RPI over the previous twelve months are included in the basket of goods reviewed for the purposes of CPI, then this will compensate to some extent for the mis-match between incomes and outgoings. Nevertheless, it is this mis-match that is the target of the RSS’s ire in the letter from its Executive Director of 15 November 2017 – describing it as “unfair” and “unjustifiable”, and it is the very existence of such unfairness which contributes to the risk that uprating the Scheme pensions, for the forthcoming year, by reference to CPI might lead to the pensions failing to keep pace with the real increases in outgoings as experienced over that year. This is an example of the fact that a conclusion as to ‘appropriateness’ in a general sense (or for other purposes) is not determinative of the question as to appropriateness for the specific purpose of the 2016 Rule: a conclusion by the UKSA, ONS and National Statistician that RPI ought not to be used at all is not determinative of the question whether it is now inappropriate to use it for uprating pensions under the Scheme, in light of the reality of its continued use in a number of other contexts.”

“I add that this is not to suggest that it is safe to rely on the continued use of RPI by other users as an objective endorsement of RPI’s appropriateness, any more than its discontinuance by other users can in itself be relied on as an objective endorsement of its inappropriateness. That is particularly so when the user in question is the state itself, where the mismatch between income and outgoings is particularly acute (taxes and other revenue being based on RPI, while benefits and state pensions are based on CPI). The constraints of policy and the national budget make it difficult to assume that such decisions are founded on an objective, reliable assessment of RPI.”

“The landscape, so far as the number and importance of users continuing to rely on RPI, is not constant, but is in a state of flux. This highlights one of the particularly acute difficulties in answering the question raised by the gateway in the 2016 Rule, when the continuing appropriateness of RPI is linked to (1) changes in perception as to flaws that have always been there, and (2) changes in its use in other contexts. That is, accepting that at some point in time the state of the general consensus as to RPI and the extent to which it is no longer used elsewhere will render it inappropriate for use in the 2016 Scheme, the identification of the tipping point from appropriate to inappropriate, along a continuum of change, is a highly fact-sensitive judgment call.”

“The recent decision by OFWAT demonstrates both aspects. Its decision was based among other things on its conclusion that RPI “is losing its legitimacy”, but it will nevertheless continue to make use of RPI until 2019 (for some purposes) and until between 2020 and 2025 (for other purposes). OFWAT’s decision is particularly relevant to the last of the seven matters relied on by BT. However, in that context insofar as the question is whether RPI continues to be appropriate for uprating pensions under the Scheme in January 2018, OFWAT’s decision is for this reason less relevant.”

“I do not suggest that it is wholly irrelevant, however, because its expression of view as to the appropriateness of RPI is to be taken into account as part of the general consensus as to RPI. Nevertheless, this again highlights an important distinction between the appropriateness, generally, of RPI and its appropriateness in the context of the Scheme. OFWAT was concerned that any index used for increasing prices had the confidence of the public and could therefore be said to have legitimacy. The same considerations of public confidence and legitimacy pull in the opposite direction where the question is whether pension payments should now be uprated by reference to CPI, and RPI continues to be used to increase a large variety of outgoings. Of more relevance, in that context, is the fact that the responses to the consultation in 2012 demonstrated widespread continuing confidence in RPI, particularly in the context of uprating pensions. While recognising that this may well have been to a large extent driven by self-interest, that is not a reason for dismissing it altogether. It was sufficient to dissuade the ONS from opting to replace the Carli formula in RPI, and it remains a relevant consideration in the context of the determination to be made in this case, given the importance of the 2016 Rule as a measure of protection for pensioners as described above.”

Conclusion (Paragraph 219)

“Having regard to the totality of the matters relied on by BT and the second Defendant as demonstrating, respectively, the disadvantages and merits of RPI, notwithstanding the powerful statements from the UKSA, ONS and others to the effect that RPI is flawed and that it ought not to be used as a measure of inflation, I have reached the conclusion for the above reasons that RPI has not at this time “become inappropriate” for the purposes of uprating pensions, within the meaning of that phrase in the 2016 Rule so as to meet the gateway threshold.

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