On the go: The change to the retail price index means that defined benefit schemes risk overpaying transfer values by 10 per cent if transfer terms are not adjusted, according to calculations by Hymans Robertson.
The government's response to the RPI reform consultation, published in November, confirmed the long-expected change to RPI that will see it aligned with the consumer price index including housing costs by 2030.
However, the market has yet to reflect this expectation, with no noticeable downwards trend predicted in 2030.
This indicates that investors are currently paying a significant premium to hedge inflation, potentially of around 0.5 per cent a year, the pensions and financial services consultancy stated.
The CPIH runs at a lower rate than the RPI, typically by around 1 percentage point a year.
Alistair Russell-Smith, head of corporate DB at Hymans Robertson, explained that transfer values are often linked to market-implied RPI.
“They do sometimes deduct an ‘inflation risk premium’ from market-implied RPI, but it is rarely as large as 0.5 per cent per annum,” he said.
“If a scheme is currently using market-implied RPI to calculate transfer values, it is arguably overstating the transfer value for RPI-linked liabilities by around 10 per cent.
“We predict that with DB pension scheme increases most commonly linked to RPI, this could have significant implications for future and current pension savers.”
