Plans to reform RPI could see savers with protected pension incomes and annuities lose out in the long-term as the government confirms there will be no compensation paid to them.
Chancellor Rishi Sunak said yesterday (November 25) that aligning RPI with the consumer price index including housing costs should not take place before 2030 but that no compensation will be paid to the holders of index-linked gilts.
He was responding to a consultation on the matter, which had suggested the two indices should be merged by 2025. Mr Sunak had already said last month that he could not consent to the reform “before the maturity of the final specific index-linked gilt in 2030.”
But as CPI runs at a lower rate than RPI, typically by around 1 percentage point a year, many in the industry have warned the move would negatively affect millions of people.
Those hit hardest would be savers who receive an inflation protected pension from a defined benefit scheme or annuity as it could see them left with a lower value retirement income in the future.
Cost to pensioners
Steven Cameron, pensions director at Aegon, warned savers could receive up to 0.8 per cent less of an increase to their pension and annuities when the change takes place.
Mr Cameron said: "Over the last 5 years, CPIH year on year increases have been on average 0.8 per cent lower than RPI.
"If this continues, someone who is already receiving or was expecting to receive increases in their defined benefit pension in line with the RPI, which will in future mirror CPIH increases might receive 0.8 per cent less of an increase in future years.
"With people living longer, a pension can last for 30 years and while 0.8 per cent might not seem like much, over 30 years it can make a big difference.
"For example, someone whose initial pension is £10,000 would with a 3 per cent compound increase each year be receiving £24,273 in 30 years' time, but with 2.2 per cent increases, that would be £19,209, or a fifth less."
He warned it would not only affect those looking to stay in a DB scheme but also those looking to transfer out.
Mr Cameron explained that transfer values could be cut in order to reflect lower future increases had they stayed in the scheme.
Ian Mills, partner at Barnett Waddingham, agreed pensioners would be the big losers, even if “most won’t feel it for years.
“Starting from 2030 this will result in a slow, steady erosion of their incomes, compared to what they might have otherwise reasonably expected,” he said, adding the chancellor had introduced "exponential decay" into the UK pensions system.
Daniela Silcock, head of policy research at the Pensions Policy Institute, highlighted recent research that illustrated the damage.
She said: “A 65 year old member retiring in 2020, from an index change in 2030 will see a reduction in the value of their lifetime income of between 4 and 5 per cent.”
Younger people would be hit harder, she continued, but would have more time to make up the difference.