Warnings of 20% member losses as RPI consultation closes

Fund house Insight Investment warned that members could lose as much as 20 per cent of their income if pensions or assets currently linked to RPI are simply aligned to the housing variant of the consumer price index, known as CPIH.

Similarly, Pensions Expert reported in September last year that a member of a defined benefit pension scheme who is retiring at age 65, on a starting income of £20,000, could lose £33,637 over the course of their retirement.

A straight switch from RPI to CPIH had been floated by previous chancellor Sajid Javid. The methodology for RPI, which typically tracks 1 percentage point above CPI, has been criticised by statistical authorities.

Despite the apparently small annual difference, the choice of inflation measure has a huge impact for DB schemes and their members. A downgrade of the inflation protections afforded to former British Steel employees made the difference between the struggling British Steel Pension Scheme and its fully funded successor, agreed in a regulated apportionment arrangement in 2017.

Courts have typically taken a dim view of employers trying to switch the basis of their indexation unless their rules explicitly permit it, in what has been termed a “rules lottery” given the random nature of original drafting.

Insight has suggested that the addition of a margin above CPIH would preserve the original value of RPI assets, without the need to continue using a flawed method.

Rob Gall, head of market strategy, commented: “If RPI is simply aligned with CPIH, we believe this would significantly reduce the pension fund benefits received by end members and may result in a transfer of wealth from index-linked gilt holders to the UK government of circa £100bn.

“A fair and equitable outcome can be achieved if RPI is aligned with CPIH plus an appropriate margin to ensure that there are no resultant losers.”