On the go: Government plans to change the way the retail price index is calculated could see savers’ lifetime pension income drop by almost 20 per cent as defined benefit schemes are hit.
Research by the Pensions Policy Institute, published on Wednesday, showed that a saver aged 65 in 2020 could receive up to 21 per cent less a year from their DB pension by the age of 90, depending on when the RPI calculation methodology is changed.
In a consultation launched alongside the UK Budget, the UK Statistics Authority proposed to align the RPI with the consumer price index including housing costs, which is expected to lower its annual rate by an average of 1 percentage point.
RPI generally runs at about 1 percentage point higher than CPI and is currently at 2.7 per cent, compared with 1.8 per cent for CPI. Compounded over the years, the choice of the less generous index can result in pensioners losing thousands of pounds, despite the CPI being considered a more accurate index.
According to the PPI's calculations, a 65-year-old male is expected to live until 86 under current life expectancy projections. His yearly average DB income under RPI uprating would be around £6,300 each year.
But this could drop by 17 per cent to £5,200 a year if the change took place from 2025, or by 12 per cent to £5,500 a year, if it took place in 2030.
Women are even worse affected by these changes as they have a longer life expectancy and could expect to see their retirement income reduced by almost 20 per cent if the change were to take place from 2025.
Due to a shortage of CPI-linked assets, most pension schemes are hedging inflation using RPI-linked guilts, and will also be affected by the change.
Daniela Silcock, head of policy research at the PPI, said: “As CPIH inflates more slowly than RPI, schemes invested in gilts will experience a drop in overall scheme assets of around £17m per £100m invested, if the reform is introduced in 2025 and around £13m per £100m if the reform is introduced in 2030.
“Private sector DB schemes collectively have around £470bn invested in index-linked gilts, and could experience an overall reduction in asset value of between £60bn and £80bn depending on when the reform is introduced.”
