Schemes who have acted to protect their funding levels could be the most at risk to a "significant" fall in funding levels if RPI and CPIH are aligned, according to analysis from Barnett Waddingham.

With a government consultation on whether to align RPI with CPIH expected in January 2020, schemes with RPI linked liabilities are "likely" to see a reduction of up to 10 per cent, or more, to their liability values if the proposals are agreed.

Barnett Waddingham warned that this could also cause a knock-on effect to scheme funding levels.

Schemes who have acted over recent years to hedge inflation risks, using RPI-linked assets to hedge CPI-linked liabilities, are likely to be "the worst hit" by the change, with the analysis showing a potential fall in funding levels by as much as 12 per cent (assuming a 1 per cent yearly fall in the future inflation measure).

However, those who have "swum against the tide of guidance" by using a high proportion of RPI-linked liabilities and a low level of RPI hedging could see a "significant improvement" to their overall funding level, according to the consultancy firm.

The extent of the impact for all schemes will depend on the proportion of RPI-linked liabilities, CPI-linked liabilities, and the timing of the change.

Barnett Waddingham principal and senior investment consultant, Ian Mills, commented: “This consultation may seem arcane and technical, but it could have seismic implications for all UK defined benefit pension schemes.

"The government runs the risk of punishing those who have been prudent, with a well-funded and well-risk-managed scheme, whereas those that have left risks unmanaged could be rewarded.

"The government needs to be careful about moral pitfalls like this, as setting such a precedent can dangerously affect trust and behaviour.

“For scheme trustees, it’s largely a game of wait-and-see over the course of the consultation. Direct holders of inflation-linked assets may wish to input into the consultation next year to articulate how they will be affected by the proposals.

"All trustees should analyse their own inflation risks, quantifying their CPI/RPI ratio to understand how exposed they are to this change."

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