Commenting on the consultation response on RPI reform published today, Matt Davis, Partner, Hymans Robertson, says:

“If RPI is aligned with CPIH from 2030 this will be a major blow both for pension schemes and their members.

“Many pension scheme members will be expected to get lower pension increases due to this change. It is common for pension schemes to pay pension increases linked to RPI so lowering the future rate of growth in RPI lowers the pension increases pensioners will receive. The impact varies according to how long the pension is expected to be paid for, but we project many younger pensioners and future retirees will see a drop in retirement income over their lifetimes of over 10% from this change. Members of defined contribution pension schemes that have purchased RPI-linked annuities would be expected to see similar reductions in their future annual increases. However, it is a crumb of comfort for pension schemes and members that the Government has stated it will continue to keep this matter under review given the number of responses from pension schemes.

“Pension schemes that have followed regulatory and industry best practice by hedging the inflation risk inherit in providing pensions are major holders of index linked gilts and other RPI-linked assets. This change means RPI-linked assets are expected to increase at a lower rate than previously anticipated, which makes them less valuable than before. The schemes that will be worst affected are likely to be those with high levels of inflation hedging and a high proportion of CPI-linked pension increases. In some cases these schemes could see a 10% fall in funding level. The Government has stated it will not offer compensation to holders of index-linked gilts which will have a huge detrimental impact.

“We expected this to have a very significant effect on investors as a whole. We estimate that the impact on the totality of index-linked gilt holders will be a loss in the region of £100 billion based on past differences between RPI and CPIH. Given the vast sums of money involved we expect to see continued pressure on the Government to review its decision not to compensate those due to lose out.”