Johannesburg - The government has defended its decision to use the revised consumer price index (CPI) to calculate the price of CPI-linked bonds as it fell within the terms and conditions with which the paper was issued.

The government regarded the revision as technical rather than fundamental, Phakamani Hadebe, the head of liability management at the national treasury, said yesterday.

A technical revision refers to modifications made as a result of errors in inflation while a fundamental revision is one based on the change of character of consumer inflation, such as a reweighting of the basket of goods used to measure inflation.

According to the terms and conditions of inflation-linked bonds, a technical revision allows the government to do exactly what it did and make a backdated adjustment to the capital value of CPI-linked bonds.

If, however, it was a fundamental revision, the government would have to ensure that investors in CPI-linked bonds are no worse off (the capital value of the bond is not affected) and that changes made only affect the future value of the bond.

A technical revision means that pension funds have to carry the loss while a fundamental revision would leave the government carrying the can.

The consumer inflation numbers had to be backdated to February last year and revised almost 2 percent lower after Statistics SA, headed by statistician-general Pali Lehohla, bungled the data.

Stats SA used outdated and exaggerated numbers to calculate consumer inflation despite being warned a year ago that the numbers were distorted.

Stanlib Asset Management, the country's fourth-largest money manager, argues, however, that the revision was fundamental and not technical.

It is seeking legal opinion on the issue.

Pension funds could lose up to R700 million if the national treasury goes ahead with its decision - a figure the government believes is dramatically overstated.

Stanlib's pension funds would make up approximately R20 million of this number.

Liston Meintjies, the chief investment officer of Plexus Asset Management, pointed out that the argument had nothing to do with whether it was a technical or fundamental revision.

A paragraph in the terms and conditions of R189, an inflation-linked bond, states: "In the event that the CPI is reset, then a new reference CPI that is applicable for the issue date will [if necessary] be calculated in such a way that the capital value of a bond is the same immediately before and after the reset."
The decision to revise the data was "clearly a reset - however that was meant to be defined - as no other clause in the terms and conditions can possibly be invoked", he said.

"All that is needed is the new reference series that separates the new official CPI with the base that has been established under the old so that the capital value of the bond is the same immediately before and after the reset," Meintjies said.