The Treasury has released a consultation on the proposed timings for the effective replacement of the Retail Price Index, a move which will impact many pension schemes.
This announcement came just ahead of today’s Budget, but pension consultants warned it could have more significant effects than many of the changes announced it the chancellor’s speech. In some cases it could cost schemes tens of millions of pounds.
LCP partner Gordon Watchorn says: “A change to the inflation measure is a big deal for pension schemes, but will create a mix of gainers and losers.
“Many schemes could see gains or losses running into tens of millions of pounds, with larger impacts than this for the very largest schemes.
“The main gainers will be schemes whose pension promises are mainly linked to the RPI, which is set to be replaced by a generally lower measure of inflation. This will especially be the case if they have not already significantly hedged against these future costs.
“Conversely, schemes which mainly face CPI-linked liabilities but which have bought RPI-linked gilts to help finance future pensions could be substantial losers.”
Watchorn adds that this will also impact individual scheme members. “The replacement of RPI by a new and lower measure of inflation could significantly reduce the amount of pension they receive over their lifetime.
“For example, a pensioner who is currently age 65 could find that replacing the RPI will reduce their pension by around 10 per cent (compared to what it would have been) by the time they are in their mid-eighties.
“Although the Office for National Statistics has indicated that the new measure will be implemented by 2030, affected pension scheme members will be concerned by the suggestion that the change could be brought forward to 2025.”
Hymans Robertson partner Laura McLaren adds: “Today’s consultation gives a clear signal that, whilst the exact timing remains uncertain, the UK Statistics Authority appears to be on a pathway to amend the underlying calculation of the Retail Price Index (RPI).
“Some pension scheme sponsors that have been stuck with RPI as a measure of inflation through the so-called ‘Rules lottery’ might welcome finally being able to follow suit with those schemes that have been allowed to change benefits to be linked to CPI. However, there is likely to be lots of lobbying from groups that could lose out.
“Those investors in RPI-linked assets, such as index-linked gilts, could see this as yet more bad news amidst this week’s market turmoil.
“Certainly many were watching closely for some mention of compensating asset holders for lower expected returns; the consultation was notably silent on this.
“Unless this changes, pension schemes hedging CPI-linked liabilities with RPI-linked assets, and individuals with RPI-linked pension benefits – who stand to see aggregate lifetime pension payments reduce by between 10-20 per cent — are likely to be amongst the biggest losers.
“Whilst the publication of the consultation is a helpful step forward, many will still be left scratching their heads at exactly how all of this will play out in practice. The detail is unlikely to be known for some time.”