The government has launched its consultation on aligning RPI with CPIH as part of today's (11 March) Spring Budget.

The consultation will seek views on the implementation of the switch, and the potential technical issues that could arise, as well as when, between 2025 and 2030, the reforms should be introduced.

Industry experts have warned that “simply switching” from RPI to CPIH with no adjustments or compensation could significantly impact scheme funding levels.

The Budget papers stated: “The consultation will cover, among other things, the issue of timing, including whether the UKSA’s proposal might be implemented at a date other than 2030, and if so, when between 2025 and 2030, and issues on technical matters concerning the implementation of its proposal.

“The consultation will be open for a period of six weeks, closing on 22 April 2020. The government and UKSA will respond to the consultation before the Parliamentary summer recess.”

The consultation, originally expected to be published in early January, was initially announced following recommendations by the UK Statistics Authority (UKSA) to scrap RPI, describing it as “not a good measure” of inflation.

Commenting on the announcement, Buck head of retirement consulting, Vishal Makkar, said: “With the launch today of the joint consultation on the future of the RPI and CPI, schemes should be seriously considering the impact of the profound potential changes which could come into effect as soon as 2025.

“Whilst you might expect paying lower future pension payments to members would be a boon for company sponsors, many schemes won’t see an improvement in their funding levels as falling asset values will wipe out any potential funding gains.

"Indeed, some schemes which already have CPI-linked pension increases could actually see funding levels deteriorate as decreasing asset values are not matched by a fall in liabilities.

“However, the real losers of any RPI to CPI change are those retirees whose pensions will receive lower increases in the future, with some losing around 1 per cent of the value of their benefits each year. It will come as cold comfort that these are the same individuals who kept RPI-linked pensions in 2011 when the scheme rules lottery took it away from many of their peers.”

Recent research from Society of Pension Professionals revealed that 50 per cent of pension professionals are most concerned about the impact on funding positions and a potential fall in asset classes.

However, whilst Willis Towers Watson research revealed earlier this year that most companies with large pension schemes have made an allowance for the proposed changes to RPI in their 2019 accounts, most organisations had only factored in around half of the potential change from 2013, and none before that date.

Insight Investment also recently drew attention to the impact on members, who could see RPI-linked benefits fall by up to 20 per cent, with transfer values also “immediately negatively affected”.

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