RPI reform: Why indexation matters

25 Aug 2020

Daniela Silcock, head of policy research at the Pensions Policy Institute, comments on the impact of the PRI Reform.

Traditionally, UK price inflation was measured by the Retail Prices Index (RPI). However, perceived flaws led to the RPI being dropped in 2013, in favour of the Consumer Prices Index (CPI) which tends to rise more slowly than the RPI.

The move from RPI to CPI was not straightforward, particularly for pension schemes. Around 64% of private sector defined benefit (DB) schemes are required by scheme rules to increase pensioner benefits by RPI while the remainder of schemes now increase pensioner benefits by CPI.

This situation is further complicated as government bonds and other inflationlinked investments used by pension schemes are generally indexed to RPI. Most private sector DB schemes use inflation-linked assets as a way of meeting current and future liabilities to pensioners.

This arrangement suits schemes with benefits which increase with RPI well but means there is a disconnect between investments and benefits for schemes which increase benefits in line with CPI. This is the background for a current consultation, which heralds the government’s intention to bring RPI in line with the methodology for CPI + housing costs (CPIH) and asks whether this change should take place in 2025 or 2030. This change will affect members and providers.

Some members will lose out

Members whose benefits are RPI-linked will experience lower increases in their future pension incomes. A 65-year-old pensioner in 2020 could receive between 4% and 9% less from their pension, over their lifetime, as a result of the change.

The provider position varies

Providers could also lose out, especially those heavily invested in RPI-linked assets. For each £10m invested in an RPI-linked asset, schemes could experience a drop in asset value of between £1m and £2m. Schemes who pay benefits rising in line with RPI will see their liabilities reduced, as they will owe future members less than previously calculated. Liability reductions may compensate somewhat for falls in asset value, though they represent a loss to members.

How do you determine fairness?

There have been calls for compensation for members and providers. Older members may not have time to make provision for a higher retirement income and will see the value of their pension income fall more quickly, relative to earnings.

On the other hand, it could be argued that members with RPI-linked benefits have already had seven years of higher increases than those with CPI-linked benefits, and that the change will level the playing field. Scheme advocates have made the pointthat schemes invested in government bonds in good faith and were in fact encouraged to do so by government bodies.

Therefore, it has been argued, some compensation for schemes affected by the change might be fair. As with all policy changes, the government is in the unenviable position of weighing up how best to serve the UK economy, pension schemes and their members while causing the least amount of financial pain to any one group. Fortunately, the consultation is still ongoing, so I would encourage all of those with a strong view to take this opportunity to have their voice heard!


More Articles



Subscribe to Our Newsletter

Sign up to the portfolio institutional newsletter to receive a weekly update with our latest features, interviews, ESG content, opinion, roundtables and event invites.

Magazine Subscription

Institutional investors qualify for a free of charge subscription to portfolio institutional. Please fill in your details to request your copy.


Magazine Subscription

Institutional investors qualify for a free of charge subscription to portfolio institutional. Please fill in your details to request your copy.

We use cookies to improve your experience on this website. For more information, please see our Privacy Policy.