The announced reform of Retail Price Index (RPI) from 2030 will have two main effects for members of pension schemes. The first is on the level of benefits you receive and the second is on the funding position of trust based defined benefit (DB) pension schemes.
Indexation in retirement
Defined benefits and annuities often have indexation based upon RPI. For some members all or some of their defined benefit pensions will be linked to RPI. For members with pensions linked to RPI that are paid after 2030, this will mean that over time their pension will increase by a smaller amount. The table below shoes that CPIH has been between 0.6% and 1% less than RPI in recent years. Public sector pension schemes have already switched from RPI to the consumer price index (CPI) for increases in retirement.
| Year | RPI | CPHI |
|---|---|---|
| 2016-17 | 1.6% | 0.8% |
| 2017-18 | 3.1% | 2.3% |
| 2018-19 | 3.3% | 2.3% |
| 2019-20 | 2.4% | 1.8% |
DB Scheme Funding Levels
The second is more complex, and may not directly effect members. Trust based defined benefit pension schemes are funded in advance and have a range of investments. The funding level is determined by the amount of their liabilities and the assets they hold.
UK defined benefit pension schemes hold a substantial amount of UK gilts and will see a negative impact on their investments from this change. Whilst schemes with benefits linked to RPI may see a positive impact from a funding position in their liabilities, the net affect of this change is expected to be negative for schemes.
Whilst a sponsoring employer is able to financially support any deficits in the scheme the funding position of the scheme will not impact members pensions. However, if the sponsoring employer becomes insolvent and a deficit in the funding level exists, members may not receive the level of pension they were expecting.
In the worst case scenario members will receive compensation from the Pension Protection Fund that can be 90% of the value of their accrued pension, with limited indexation in retirement.
Why is this happening?
The criticism of the mythology of the calculation of the Retail Price Index (RPI) led to the removal of it’s designation as a national statistic by the Office for National Statistic in 2013.
The removal of this designation has not impacted it’s continued use by pension schemes, government and consumer companies as measure for inflation. Whilst the Government has already switched to the Consumer Price Index (CPI) for price inflation for increases to public sector and state pensions and government benefits, it has continued to use RPI for increases to train fares and government index linked gilts.
In March 2020 the Government and the UK Statistics Authority published a joint consultation on the future of RPI. They proposed replacing the methodology for the calculation of RPI with CPIH. The CPIH measure is similar to CPI with an amendment to including housing costs. Feedback was sought on whether this change should happen in 2025 or 2030 and how this should be implemented.
Prospect responded to this important consultation on behalf of our members arguing that the calculation of RPI should be fixed and not replaced with CPIH branded as RPI. The unions response concludes that the UKSA wish to impose the CPIH, a measure the statistical establishment seems to favour but which has little public credibility or confidence. The response highlights that CPIH falls short of the ONS’s own plans to develop a household measure of inflation, the adoption of it under the label of the RPI will fail those users requiring a household measure of inflation. You can read our full response here.