It has been announced today that the RPI measure of inflation will be amended from 2030 to be aligned to CPIH. This technical change will have wide-reaching implications for UK defined benefit pension schemes in the private sector.

Responding to the announcement and what it means for pension schemes, Jonathan Camfield, Partner at LCP said:

“Finally, after a decade of uncertainty we have clarity on the future of RPI. We know that it’s a poor measure of inflation but there will be some schemes harder hit than others as we transition to the new measurement. There will be implications for UK pension schemes on both their assets and their liabilities. However, there will be a lot of variation from scheme to scheme, as it depends on the extent to which RPI is currently used for pension increases and whether the scheme holds RPI-linked assets.

“Schemes may see falls in their assets but on the liability side the situation is more nuanced and the liability value could either decrease or increase. This is because they typically depend crucially on both RPI – which is essentially decreasing on this announcement – and CPI which might be assessed differently in the new market environment.

“The schemes that will suffer the most are those that have invested heavily in index-linked government bonds and have their benefit increases linked to CPI. In these cases, the scheme suffers the loss on the asset value, but makes no corresponding gain on the liability side – increasing the deficit overall. Those that have taken out buy-ins may be in a pretty good position as they provide a precise match for the liabilities and so avoid the risk of such step changes increasing the deficit.”

On implications for members, Alex Waite, Partner at LCP, added:

“Pensioners will be concerned about what this means for them. From 2030 they may have significantly lower pensions benefits. Although the new measure of inflation may only be ½% - 1% per annum lower, over a retirement lasting decades this can really mount up. For instance, we estimate that a typical 65 year-old woman will see her pension end up 15% lower under the new measure than if RPI had been retained, for a man this would be slightly lower at 14%. For a pension of £10,000 per year – her pension could end up £1,500 lower. But between now and 2030 nothing will change for most people.”

LCP has analysed the potential impact for different age bands below: