Industry view – Pensions Policy Institute


methodology for CPI + housing costs (CPIH) and asks whether this change should take place in 2025 or 2030. This change will affect members and providers.


Daniela Silcock is head of policy research at the Pensions Policy Institute


INDEXATION MATTERS


Traditionally, UK price inflation was meas- ured by the Retail Prices Index (RPI). How- ever, perceived flaws led to the RPI being dropped in 2013, in favour of the Consumer Prices Index (CPI) which tends to rise more slowly than the RPI. The move from RPI to CPI was not straightforward, par- ticularly for pension schemes. Around 64% of private sector defined benefit (DB) schemes are required by scheme rules to increase pensioner benefits by RPI while the remainder of schemes now increase pensioner benefits by CPI.


This situation is further complicated as government bonds and other inflation- linked


investments used by pension


schemes are generally indexed to RPI. Most private sector DB schemes use infla- tion-linked assets as a way of meeting cur- rent and future liabilities to pensioners. This arrangement suits schemes with ben- efits which increase with RPI well but means there is a disconnect between investments and benefits for schemes which increase benefits in line with CPI. This is the background for a current con- sultation, which heralds the government’s intention to bring RPI in line with the


Some members will lose out Members whose benefits are RPI-linked will experience lower increases in their future pension incomes. A 65-year-old pensioner in 2020 could receive between 4% and 9% less from their pension, over their lifetime, as a result of the change.


The provider position varies Providers could also lose out, especially those heavily invested in RPI-linked assets. For each £10m invested in an RPI-linked asset, schemes could experience a drop in asset value of between £1m and £2m. Schemes who pay benefits rising in line with RPI will see their liabilities reduced, as they will owe future members less than previously calculated. Liability reductions may compensate somewhat for falls in asset value, though they represent a loss to members.


How do you determine fairness? There have been calls for compensation for members and providers. Older mem- bers may not have time to make provision for a higher retirement income and will see the value of their pension income fall more quickly, relative to earnings. On the other hand, it could be argued that mem- bers with RPI-linked benefits have already had seven years of higher increases than those with CPI-linked benefits, and that the change will level the playing field. Scheme advocates have made the point


that schemes invested in government bonds in good faith and were in fact encouraged to do so by government bod- ies. Therefore, it has been argued, some compensation for schemes affected by the change might be fair.


As with all policy changes, the government is in the unenviable position of weighing up how best to serve the UK economy, pen- sion schemes and their members while causing the least amount of financial pain to any one group. Fortunately, the consul- tation is still ongoing, so I would encour- age all of those with a strong view to take this opportunity to have their voice heard!


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