RPI shake-up: Gains and losses could run into tens of millions of pounds for pension schemes

Following the publication today of the Treasury’s consultation on proposed timing of the effective replacement of the Retail Prices Index, Gordon Watchorn, partner at pension consultants LCP said:

On the impact on pension schemes:

“A change to the inflation measure is a big deal for pension schemes, but will create a mix of gainers and losers. Many schemes could see gains or losses running into tens of millions of pounds, with larger impacts than this for the very largest schemes. The main gainers will be schemes whose pension promises are mainly linked to the RPI, which is set to be replaced by a generally lower measure of inflation. This will especially be the case if they have not already significantly hedged against these future costs. Conversely, schemes which mainly face CPI-linked liabilities but which have bought RPI-linked gilts to help finance future pensions could be substantial losers.”

On the impact on pension scheme members:

“For individual pension scheme members, the replacement of RPI by a new and lower measure of inflation could significantly reduce the amount of pension they receive over their lifetime. For example, a pensioner who is currently age 65 could find that replacing the RPI will reduce their pension by around 10% (compared to what it would have been) by the time they are in their mid-eighties. Although the Office for National Statistics has indicated that the new measure will be implemented by 2030, affected pension scheme members will be concerned by the suggestion that the change could be brought forward to 2025.”