Defined Benefit  

Pension inflation measure to change

Pension inflation measure to change

The method to calculate the retail price index could change in the next decade, meaning members of defined benefit schemes could receive lower pension increases.

Chancellor of the exchequer Sajid Javid announced today (September 4) that the government will consult on a reform of the RPI, with the goal to align it with the consumer prices index, including housing costs.

Mr Javid was responding to a proposal from the UK Statistics Authority, which stated that RPI isn’t a good measure for inflation, as it was intended to be a legacy index and was dropped as the official measure in 2010.

But scrapping RPI could leave pensioners of DB schemes £12,000 worse off, according to calculations from Unison.

RPI generally runs at about 1 percentage point higher than CPI and is currently 2.8 per cent, compared to a CPI of 1.9 per cent.

Pension schemes can link increases to their employees' pensions - and therefore the employers' liabilities - to CPI, as long as their own rules don’t specifically mention RPI.

This has been the subject of several recent court cases, such as BT's or Barnardo’s, in which trustees and employers sought approval to change their inflation indexation to reduce benefit payments to members.

In January, a report from a House of Lords committee recommended using a single inflation measure to stamp out the process of "index-shopping" by the government.

The chancellor declined to make changes to RPI before 2025, as requested by the UK Statistics Authority.

Instead, the government will launch a consultation in January 2020 to ask whether this change should be made at a date other than 2030, and if so, when between 2025 and 2030.

The UK Statistics Authority will consult on technical matters around how to align the indexes, and the response will be published before the Spring Statement and the end of the financial year.

Sir David Norgrove, chairman of the UK Statistics Authority, noted RPI “isn’t a good measure, at times significantly overestimating inflation and at other times underestimating it".

He said: “However, the RPI is unique as we need consent from the chancellor to make certain changes, such as the one we have proposed.

“Although we regret that no change will occur before 2025, we welcome the chancellor’s intention to consult on resolving current issues with the RPI.

“We continue to urge the government and others to cease to use the RPI. It would be wrong for the government to continue to use a measure of inflation which it itself accepts is flawed, where it has the opportunity to change.”

Sir Steve Webb, former pensions minister and director of policy at Royal London, said: “The pensions world may welcome the fact that this issue has been kicked into the long grass by the government."

But he added: “As a result of today’s announcement there are unlikely to be any major changes to the RPI for at least five years, and possibly for a decade.