Pensions - Articles - Aligning RPI with CPIH may lead to pensions plunge of 80bn


The Pensions and Lifetime Savings Association (PLSA) has informed the Government that aligning the Retail Price Index (RPI) with the Consumer Price Index (CPIH) could see pension schemes up to £80bn worse off.

 The warning comes as part of the PLSA’s response to the Treasury and UK Statistics Authority’s consultation paper on reforms to RPI.

 Defined benefit (DB) pension schemes will be significantly impacted if the government decides to go ahead with the change because the RPI rate is structurally higher than CPIH by an average of around 1% per year. Currently, pension schemes invest an estimated £470bn in index-linked bonds. The Pensions Policy Institute (PPI) estimates a switch to CPIH without any mitigating steps would reduce the value of these investments by £60bn if made in 2030 and £80bn if done in 2025. Employers will have to make up the shortfall via increased contributions to close the increase in scheme deficits.

 In addition, the PLSA said that, depending on their age and the timing of the change, individual pension scheme members will lose an average of 4-9% of their total lifetime pension income. A man aged 65 in 2020 could see a drop in his yearly average DB income by as much as 17% if changes are made in 2025 and a woman of the same age could see her yearly average DB income drop by 19%, also if changes are made in 2025. This is because the level of annual inflation protection will be lower in future under a CPIH-based methodology compared to the current RPI-based approach.

 The solution proposed by the PLSA is to transition away from the use of RPI in a fair and equitable way. The government and the UKSA could adjust index-linked gilts from RPI to CPIH plus a transparently calculated adjustment reflecting the expected long term average future income of RPI over the new inflation measure. This solution is commonly referred to within the pensions industry as “CPIH + a spread”. Alternatively, the Government may also wish to consider paying any future lost income to index-linked gilt holders upfront.

 A precedent has already been set for reforming benchmarks, as in the case of LIBOR, where a Working Group was established to ascertain that the transition to the replacement index, SONIA, minimised the impact on stakeholders. The PLSA believes the government should consider implementing a similar approach.

 Whatever approach the Government decides, on top of mitigation, the changes should be made as close to 2030 as possible to allow a Working Group for the transition to be established and to give investors in index-linked gilts enough time to prepare for the change.

 Tiffany Tsang, Senior Policy Lead: LGPS and DB, PLSA, said: “The decision to develop a more robust measure for inflation is the right one but the proposed methodology risks billions of pounds in pension assets. Pension schemes have made RPI-linked investments in good faith, and under the guidance of the regulators, to prudently fund pension benefits. They should not face short-falls as a result of the changes.

 “Moreover, the new method of calculating how much to increase pensions each year to take account of inflation could result in cuts to people’s pensions of up to 9% over a lifetime. This will make it less likely they will have an adequate income in retirement.

 “In its plans to reform the inflation measure, we strongly urge the Government to mitigate the detrimental impact this change will have on holders of index-linked gilts and find an equitable transition away from RPI.”

 The PLSA’s full response to the consultation 
  

Back to Index


Similar News to this Story

Wish list for the occupational pensions industry in 2025
As one year closes and another begins, it's an opportune moment to set our sights on the future. The UK occupational pensions industry faces nume
PSIG announces outcome of Consultation
The Pensions Scams Industry Group (PSIG), which was established in 2014 to help protect pension scheme members from scams, today announced the feedbac
Transfer values fell to a 12 month low during November
XPS Group’s Transfer Value Index reached a 12-month low, dropping to £151,000 during November 2024 before then recovering to its previous month-end po

Site Search

Exact   Any  

Latest Actuarial Jobs

Actuarial Login

Email
Password
 Jobseeker    Client
Reminder Logon

APA Sponsors

Actuarial Jobs & News Feeds

Jobs RSS News RSS

WikiActuary

Be the first to contribute to our definitive actuarial reference forum. Built by actuaries for actuaries.