Government plans to align the Retail Prices Index (RPI) with the Consumer Prices Index and housing costs (CPIH) are likely to cause an increase to defined benefit (DB) scheme deficits, according to the Pensions Policy Institute (PPI).

A PPI briefing note reasoned that DB scheme assets currently invested in index-linked bonds amount to around £470bn, while the total value of the bond-related impact of a 2025 switch to CPIH on DB schemes could be approximately £80bn.

If the switch is made in 2030, the note said the cost could be around £60bn and added that there could be further impact from investments in other RPI-linked assets.

PPI noted that inflation increases on scheme investments in swaps and index-linked gilt repurchase agreements would be repaid at a lower than expected rate if the proposals went ahead.

However, scheme liabilities could fall in respect of members whose benefits are increased or revalued in line with RPI increases.

The note said members could see a reduction in their lifetime and annual benefits, with women and young savers likely to experience the most signification decrease due to longer life expectancy.

PPI estimated that a 65-year-old male pensioner could receive a total lifetime DB pension benefit of £144,000 in 2020 if uprated by RPI, though his total pension could decrease by 8 per cent or 4 per cent depending on whether RPI and CPIH are aligned in 2025 or 2030.

Comparatively, a female pensioner of the same age could be given a total lifetime DB pension benefit of £158,000 if uprated by RPI, which could drop by 9 per cent or 5 per cent due to RPI/CPIH alignment in 2025 or 2030.

PLSA policy lead for DB and LGPS, Tiffany Tsang, said: “RPI is a flawed measure of inflation, but plans to phase it out must take into consideration the £60-80bn impact on pension schemes, which have made RPI-linked investments in the interests of their members, in good faith.

“Workers’ savings must not be unduly compromised by an administrative change in the measure of inflation that acts, in effect, as a stealth tax on retirees. Any change should therefore necessarily be offset by fair and appropriate mitigation for schemes.”

Proposals for the RPI to become aligned to CPIH are currently under a consultation, launched by the government on 11 March alongside the Spring Budget.

This consultation is being used to identify the potential technical issues that could arise from the switch, as well as when, between 2025 and 2030, the reforms should be introduced.

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