Pensions face RPI-CPI basis risk

The UK government has proposed changing the reference rate for pension funds from the retail prices index to the consumer price index. The switch could make pension liabilities much more complex – creating significant problems for those looking to hedge. By Nick Sawyer


An announcement by the UK government in July that a chunk of the pensions market will use the consumer price index (CPI) rather than the retail prices index (RPI) to calculate annual increases in pension payments sent inflation markets into a spin. Thirty-year inflation swaps dropped by around 15 basis points in the days following the announcement, as market participants struggled to make sense of what it would mean for the hedging of pension liabilities and the inflation market as a whole

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