The Pensions and Lifetime Savings Association (PLSA) has warned the government that plans to align the Retail Price Index (RPI) with the Consumer Price Index including owner occupiers’ housing costs (CPIH) could leave pension schemes £80bn worse off.

Pension scheme members could lose out on up to 9 per cent of their total lifetime pension income as a result of the alignment, depending on their age and the timing of the change, according to the organisation.

Its warning comes in response to the Treasury and UK Statistics Authority’s (UKSA) consultation on RPI reforms, which is due to close at midnight tomorrow (21 August).

The PLSA stated that defined benefit (DB) schemes would be “significantly impacted” because the RPI rate is structurally higher than CPIH by an average of 1 per cent annually.

Pension schemes currently invest an estimated £470bn in index-linked bonds, with the PLSA citing analysis by the Pensions Policy Institute (PPI) that estimated the switch to CPIH without mitigating steps would reduce the value of these investments by £60bn if alignment occurred in 2030 and by £80bn if aligned in 2025.

It warned that employers would have to make up the shortfall via increased contributions to meet the rise in scheme deficits.

Additionally, the PLSA noted that a man aged 65 in 2020 could see a drop in his annual average DB pension income by up to 17 per cent if the changes are made in 2025 and a woman of the same age could see her DB income fall by up to 19 per cent a year.

It cited the lower level of annual inflation protection in the future under CPIH-based methodology in comparison to RPI-based as the key driver behind these losses.

The PLSA proposed that the move away from using RPI could be cone in a “fair and equitable way” if the government and the UKSA adjusted index-linked gilts from RPI to CPIH plus a transparently calculated adjustment reflecting the expected long-term average future income of RPI over the new inflation measure.

Another solution could be if the government paid any future lost income to index-linked gilt holders upfront, according to the organisation.

It also urged the government to make the changes as close to 2030 as possible to allow a working group for the transition to be established and give investors time to prepare for the change.

Commenting on the consultation, PLSA senior policy lead: LGPS and DB, Tiffany Tsang, said: “The decision to develop a more robust measure for inflation is the right one but the proposed methodology risks billions of pounds in pension assets.

“Pension schemes have made RPI-linked investments in good faith, and under the guidance of the regulators, to prudently fund pension benefits. They should not face shortfalls as a result of the changes.

“Moreover, the new method of calculating how much to increase pensions each year to take account of inflation could result in cuts to people’s pensions of up to 9 per cent over a lifetime. This will make it less likely they will have an adequate income in retirement.

“In its plans to reform the inflation measure, we strongly urge the government to mitigate the detrimental impact this change will have on holders of index-linked gilts and find an equitable transition away from RPI.”

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