Government plans to align RPI with CPIH could negatively affect more than 10 million defined benefit (DB) pension scheme members, Insight Investment has warned.

It is widely expected that the government will propose the inflation measure change in the upcoming Budget (11 March) and launch a consultation as to when the reform should take place.

If the RPI reform occurs, Insight Investment warned that the value of RPI-linked benefits could fall by up to 20 per cent and transfer values will be “immediately negatively affected”.

“It would also result in a wealth transfer of £90bn to £120bn from holders of index-linked gilts - predominantly UK pension funds and insurers - to the UK government,” said Insight Investment senior pensions strategist, Jos Vermeulen.

“Pension funds purchased this debt in order to de-risk, hedging long-term liabilities, strengthening UK financial stability as a result.

“They did so in good faith based on a clear and consistent message that the methodology for calculating RPI would not be changed.”

According to Insight Investment, the alignment would reduce the return of RPI by 1 per cent per year.

Vermeulen warned that the issue may be “flying under the radar”, which he believed could be down to its “apparent complexity preventing it from being treated with the proper scrutiny it deserves”.

He continued: “A consultation on the amendment is scheduled to be launched at this week’s Budget. As it stands, the focus of the consultation appears to be on the timing of the change, rather than the economic consequences.

“That is cause for alarm given the proposed changes could damage the future incomes of pensioners and the asset values of pension funds.

“Pensioners and pension funds must be given the opportunity to raise their concerns within the coming consultation.”

The consultation was scheduled for January 2020 but was delayed until the Budget (11 March).

The Society of Pension Professionals recently found that more than half (58 per cent) believes that RPI reform should “go further” than simply switching to CPIH with no compensation.

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