Defined Benefit  

‘Millions to lose out’ as court rejects RPI reform appeal

‘Millions to lose out’ as court rejects RPI reform appeal

Industry commentators have warned that millions of pensioners stand to “lose out” after the High Court rejected a judicial review, brought by some of the country’s largest defined benefit schemes, against the government’s plans to replace the retail price index with the consumer price index including housing.

Trustees of the BT, Ford and Marks and Spencer pension schemes — which represent nearly 450,000 members and £83bn of assets — joined forces and filed for judicial review against the government’s plans, and permission to proceed was granted in December last year.

Industry experts have predicted that more than 10mn pensioners could stand to lose out, in the form of lower payments or lower transfer values, should the RPI be officially superseded by the CPIH, because the latter tends to produce a lower account of inflation. For example, in July 2022, RPI inflation was 12.3 per cent, while CPIH was 8.8 per cent.

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Proponents of the switch argue that the CPIH, which uses a geometric mean to aggregate price changes as opposed to the arithmetic mean deployed for the RPI, better accounts for the substitution between goods and services when relative price changes.

The RPI was removed as a national statistic in 2013, the Office for National Statistics having deemed it “a very poor measure of general inflation, at times greatly overestimating and at other times underestimating changes in prices and how these prices are experienced”.

But opponents have argued that, besides the deleterious effects it would have on members’ financial position, the change would also reduce the value of RPI-linked assets held to meet schemes’ promises to members, thus weakening funding positions and placing more pressure on sponsoring employers.

Complaints were raised back in 2020 when the government announced it would press ahead with the change, albeit pushing back the date from 2025 to 2030. According to some industry commentators, the effect would be to transfer around £100bn from index-linked gilt holders to the government, and to warn of the “steady erosion” of pensioner incomes.

Case fails on every ground

In deciding the case, Justice Holgate noted that the “flaws in the methodology” of RPI were responsible for it, typically, running 1 per cent higher than CPIH, and that the UK Statistics Authority had already decided to downgrade it to the status of “legacy index” — and only retaining it as such because of its presence in commercial contracts.

“About 10.5mn people in the UK have private sector DB pensions, a majority of which are linked to the RPI. It is said that they will receive reduced payments amounting to 4-9 per cent of their lifetime benefits. On average women are expected to experience a greater reduction because of their longer lifespan,” he explained.

The trustees of the claimant schemes based their case on three principal arguments: first, that the UKSA’s RPI decision fell outside its power to amend RPI; second, that it failed to account for the impact its decision would have on RPI-linked gilts, bonds and index-linked pensions, thus failing its duties under the Equality Act 2010; and third, that the chancellor failed to account for the same in deciding not to award compensation.