Ahead of the Budget, Jos Vermeulen, Senior Pensions Strategist at Insight Investment, said: “A seismic change to pensions is looming and, if left unaddressed, it has the potential to negatively impact the retirement savings of millions of ordinary pension scheme members and the funding levels of the pensions schemes they belong to. Even so, this issue is flying under the radar, perhaps because its apparent complexity is preventing it from being treated with the proper scrutiny it deserves.
“More than 10 million members of defined benefit pension schemes stand to be affected by proposed changes to the underlying calculation of the Retail Price Index (RPI). If RPI is subject to a simple fix, as currently proposed, the value of RPI-linked benefits could fall by up to 20% and transfer values will be immediately negatively impacted.
“It would also result in a wealth transfer of £90bn to £120bn from holders of index-linked gilts - predominantly UK pension funds and insurers - to the UK government. Pension funds purchased this debt in order to de-risk, hedging long-term liabilities, strengthening UK financial stability as a result. They did so in good faith based on a clear and consistent message that the methodology for calculating RPI would not be changed.
“Nevertheless, the government appears to be on a pathway to make this amendment to the underlying calculation of RPI. The proposal is to align the measure with the Consumer Price Index including owner-occupiers housing costs (CPIH). Based on the average difference between the two measures of inflation from 2010 onwards, this would reduce the return of RPI by 1% per annum.
“A consultation on the amendment is scheduled to be launched at this week’s budget. As it stands, the focus of the consultation appears to be on the timing of the change, rather than the economic consequences.
“That is cause for alarm given the proposed changes could damage the future incomes of pensioners and the asset values of pension funds.
“Pensioners and pension funds must be given the opportunity to raise their concerns within the coming consultation.”
For more details on the RPI change and its potential impact, please see the following link: https://www.rpireform.com/
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