Pension schemes should be taking action now to engage with policy makers on potential RPI/CPI changes, according to Insight Investment.

The firm has said that aligning RPI with CPIH, plus an appropriate margin, would ensure a “fair and equitable outcome” for everyone and have urged schemes to engage now to influence policy with such solutions, rather than focusing purely on mitigating risk.

The group have suggested a margin should be a calculated adjustment to reflect the expected long-term average premium of RPI over the new inflation measure.

Commenting on the proposed changes, Insight Investment head of solution design, Jos Vermeulen, said: “Attention at the moment needs to be focused on an urgent issue, the proposed change to the RPI. This is an immediate concern which has the power to influence pensions for decades to come.

“UK pension funds, advisers and asset managers should engage with policymakers now, before the consultation takes place, to make sure they can influence the outcome…Nobody needs to lose out from this change.”

Throughout November the CPI inflation rate has remained at the three year low it hit in October (1.5 per cent), impacting both scheme and individual pension valuations.

Vermeulen added: “Investors in RPI-linked assets such as index-linked gilts will be seriously affected. We estimate that the impact on the index-linked gilt market would be a loss of value in the region of £90bn.”

In their report on the change, the firm emphasised that as the proposed changes are not expected to come into force until 2030, only RPI-linked assets that mature after this date will be affected.

As a result, they have urged trustees to review the size and shape of their inflation hedge, leaving them the option to reduce the funds sensitivity to RPI changes ahead of this date and consider moving to CPI-linked assets where possible.

This follows a survey from Barnett Waddingham that found “well-risk-managed schemes” were most at risk to RPI/CPIH changes.

Vermeulen echoed this concern, stating: “Pension funds with CPI-linked liabilities who have taken prudent steps to hedge these liabilities using index-linked gilts will see their funding status deteriorate.

“There is an irony here given the purchase of RPI-linked gilts for hedging has been the biggest re-allocation of UK DB pension fund assets made over the past 10 years.”

Trustees have also been encouraged to review de-risking triggers and engage further with asset managers of any RPI-linked assets to ensure they are aware of how the changes could impact their portfolio.

However, the report highlighted that if markets were to perceive that the change would default on contractual obligations or redirect from investors to the government, there could be implications, not only for government credibility, but also from a legal view.

Vermeulen added: “With official statements previously confirming no planned future change to RPI, those pension funds that have bought RPI-linked gilts will rightfully seek compensation and question the reliability of lending assets to the UK government in future."

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