The government’s proposals to align the Retail Price Index (RPI) with the Consumer Price Index including owner occupiers’ housing costs (CPIH) could cost savers and investors up to £122bn if implemented in 2025, the Association of British Insurers (ABI) has warned.

In its response to the government’s consultation, the ABI emphasised that even the latest implementation date of 2030 would only reduce the impact to £96bn.

Considering this, the association called for the "latest possible implementation date" to be used in order to reduce the impact on savers, also recommending that compensation be given to savers, given the financial implications for them and the wider economy.

It argued that savers, especially those with defined benefit pensions, as well as companies that invest in government debt linked to inflation, would all be affected by the changes.

ABI director of conduct and regulation, Hugh Savill, added: "It is widely accepted that the RPI model is less than perfect, but the proposal’s impact will be felt by policyholders and pension savers for decades.

“If the reforms go ahead, and given the impact for savers and the wider economy, it is vital the implementation date is later rather than sooner.

“Compensation by the government should also be seriously considered to avoid creating winners and losers.”

Commenting on ABI’s analysis and the broader proposals, AJ Bell senior analyst, Tom Selby, emphasised that the impact of the proposals would be felt by "a huge number of people in different way".

He argued that replacing RPI with CPIH in calculating members' retirement income rises for instance, would represent a "stealth cut" to people's retirement pots, with any annuities linked to RPI also worth less under the reforms.

“Anyone invested in index-linked gilts - including individuals and pension funds - would also see the value of their holdings tumble if the government applied a blanket overnight switch from RPI to CPIH," he added.

Selby warned that the “big question” facing the government is the extent to which it will mitigate any negative impact on people with pensions and investments explicitly linked to RPI, suggesting that one option would be to maintain a notional RPI which these contracts could adopt.

He also noted that whilst ditching RPI could be good news for young people and commuters, the government has “doggedly” continued to link rail fair increases and student loan repayments to RPI, ensuring “a quiet and creeping boost to Treasury coffers”.

Selby highlighted that in contrast, the state pension, benefit payments and tax thresholds have been linked to the lower CPI measures, noting that this has led to accusations of ‘index shopping’ by successive administrations.

“Moving away from RPI to CPIH could precipitate an end to this approach and provide a much-needed boost for indebted students and rail passengers,” he clarified.

The ABI's analysis follows a number of recent responses to the ongoing consultation, with the Pensions and Lifetime Savings Association (PLSA) yesterday predicting that the reforms would cost pension schemes in particular as much as £80bn, whilst Redington also called for the reforms to be implemented at the "latest proposed time".

Insight Investment also previously called on pension schemes to engage with members on the potential impact of the switch, predicting that the reforms will have “a significant impact on more than 10 million people in the UK”.

Insight head of solution design, Jos Vermeulen, has since also highlighted the impact of Covid-19 on the proposals, emphasising that this has increased the “pain” by £10bn since March.

In light of this, pension schemes and other holders of index-linked gilts now facing a transfer of wealth to the UK government of up to £130bn, compared to the £120bn predicted previously.

Furthermore, he emphasised that for pension schemes, the resulting hit to funding levels could compound problems for companies already struggling with deficits in light of the Covid-19 crisis.

Vermeulen highlighted the need for industry and member engagement in response to the consultation, arguing that an issue “of this magnitude” impacting “millions of people”, needs the “broadest possible range of input” before being decided on.

He also reiterated the firm's belief that “a fair and equitable outcome” can be achieved if RPI is aligned with CPIH plus an appropriate margin, ensuring there are no "resultant losers".

However, he emphasised that the impact of the reform will be felt "immediately" by both pension schemes and individuals, with calculations showing that the current proposal could see members losing up to 20 per cent of their expected income.

He added: "This will have a significant effect, not only for those entering retirement but also any members who may be looking to enter pension transfer deals and suddenly find their hard-earned pots are worth significantly less.

“Through our own technical response to the consultation, we have urged the UK government and UK Statistics Authority to give careful consideration to the broader economic consequences of reform before making their final decision. We can now only hope they listen.”

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