On the go: The Pensions Policy Institute has said that the household costs indices, which is currently being developed by the Office for National Statistics, could better reflect changes in pension income than current methodologies.
The government is pressing ahead with reforms to the retail price index, with plans to bring the methods and data used in the calculation of the consumer price index that includes owner occupiers’ costs into the measurement of the RPI, while continuing to publish the latter separately.
In September, trustees of the BT, Ford and Marks and Spencer pension schemes — which represent nearly 450,000 members and £83bn of assets lost a joint appeal for a judicial review against the government’s plans.
Industry experts have predicted that more than 10mn pensioners could stand to lose out, in the form of lower payments or lower transfer values, should the RPI be officially superseded by the CPIH, because the latter tends to produce a lower account of inflation. In July 2022, RPI inflation was 12.3 per cent, while the CPIH was 8.8 per cent.
“The 2030 changes to RPI may reduce the spending power of defined benefit pensioners beyond the levels calculated by the PPI in 2021,” the PPI warned in a briefing note published on September 29.
“RPI is now increasing up to 2.6 per cent more than CPI,” it continued. The PPI warned that if inflation continues to record momentary spikes, the level that DB pensioners might miss out on through RPI reform “could be far higher” than the 12 per cent to 13 per cent of income it cited in its note, giving the example of a member that deferred for 10 years in 2020 and takes their benefit at age 65 in 2030.
“This means that pensioners will face increased uncertainty about how their income might inflate in future and the degree to which they might need to mitigate the impact of the reforms,” it warned.
The PPI considered whether, instead of adopting the CPIH as the most appropriate measure for household benefits and pensions uprating, if HCIs should be used for these.
It observed that HCIs “are intended to use more granular calculations of household expenditure, and better reflect changes within day‐to‐day household costs”, including mortgage payments, council tax payments, and UK residents’ overseas expenditure.
“The HCIs, currently under development, could help ensure that in future pensioner income better reflects changes in need,” the PPI added.
