On the go: The trustees of the BT, Ford and Marks and Spencer schemes are considering whether to appeal against the judgment handed down by the High Court, which struck down their judicial review against the government’s plans to axe the retail price index.
Some in the industry were dismayed by the decision, handed down on September 1, warning that it would lead to millions of pensioners seeing their benefits erode, while the government’s decision not to compensate holders of RPI-linked gilts drew particular ire.
The RPI typically tracks higher, meaning a switch to the consumer price index including housing would see members’ pensions and transfer values reduced, while decreasing the value of RPI-linked assets, thereby weakening scheme funding positions and placing more pressure on sponsoring employers.
Proponents of the move argue that the CPIH is a better and more accurate index, because it accounts for the substitution of goods and services when the relative price changes, while the Office for National Statistics has dismissed the RPI as “a very poor measure of general inflation, at times greatly overestimating and at other times underestimating changes in prices and how these prices are experienced”.
Justice Holgate, the judge in the case, found against the schemes’ trustees on each of the three grounds they had presented. The trustees had argued that the UK Statistics Authority’s RPI decision fell outside its power to amend the RPI; that it failed to account for the impact its decision would have on RPI-linked gilts, bonds and index-linked pensions, thus failing its duties under the Equality Act 2010; and that the chancellor failed to account for this in deciding not to award compensation.
This led Jos Vermeulen, head of solution design at Insight Investment, to reiterate the “significant concerns” raised by “a broad range of market participants” during the government’s 2020 consultation on the proposed switch.
“It was of no surprise that three UK [defined benefit] pension funds felt they had no choice but to challenge the government’s decision, which will result in a transfer of wealth in the region of £100bn from index-linked gilt holders (largely pension funds) to the government,” he said, adding that the decision could end up reducing pensioner incomes by more than 15 per cent, even as inflation continues to surge and people struggle to cope with a cost of living crisis.
Responding to the ruling, the schemes’ representatives expressed their disappointment that the government should be allowed to press ahead with the change “without proper consultation and consideration of the impact such a decision will have on schemes holding RPI index-linked bonds and the retirement incomes of their members”.
“Many investors, including pension funds, bought index-linked gilts in good faith and now face losses of £90bn to £100bn,” they said.
They added that the decision would leave “millions of pensioners in DB schemes with RPI-linked benefits poorer through no fault of their own and facing substantial decreases in their year-on-year income. Women will be particularly impacted since they live longer and retire earlier”.
The schemes are said to be considering the judgment, and the possibility of appealing it.
