Vishal Makkar, Head of Retirement Consulting at Buck in the UK comments on the launch of the RPI/CPI consultation:
“With the launch today of the joint consultation on the future of the RPI and CPI, schemes should be seriously considering the impact of the profound potential changes which could come into effect as soon as 2025.
“Whilst you might expect paying lower future pension payments to members would be a boon for company sponsors, many schemes won’t see an improvement in their funding levels as falling asset values will wipe out any potential funding gains. Indeed, some schemes which already have CPI-linked pension increases could actually see funding levels deteriorate as decreasing asset values are not matched by a fall in liabilities.
“However, the real losers of any RPI to CPI change are those retirees whose pensions will receive lower increases in the future, with some losing around 1% of the value of their benefits each year. It will come as cold comfort that these are the same individuals who kept RPI-linked pensions in 2011 when the scheme rules lottery took it away from many of their peers.”
Gordon Watchorn, partner at pension consultancy LCP, said:
On the impact on pension schemes:
“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.”
On the impact on pension scheme members:
“For individual pension 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% (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.”
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