The Association of British Insurers (ABI) has found government proposals to reform the calculation of the retail price index (RPI) could cost the pensions industry £122bn ($161.3bn, €136.4bn) if plans go ahead.
As some long-term saving products, especially defined benefit (DB) pensions, are linked to the RPI measure of inflation, changing to consumer prices index including owner occupiers’ housing costs (CPIH) would “significantly reduce the expected returns on these assets, leaving savers out of pocket”, the ABI said.
Estimates by ABI members have found that implementing the proposed changes in 2025 could leave those affected worse off by up to £122bn by reducing the value of index-linked gilts.
The latest proposed implementation date of 2030 would only reduce the impact to £96bn.
Consultation
The UK government and the UK Statistics Authority are consulting on reforms to align RPI to the CPIH, which would come in between 2025 and 2030.
In its response to the consultation which closes on 21 August, the ABI is calling for the latest possible implementation date to reduce the impact on savers.
The ABI also said compensation for savers should be considered “given the financial implications for them and the wider economy if the reforms go ahead”.
It is expected people with life insurance, pension policyholders and DB pension scheme members will be most affected.
Hugh Savill, director of conduct and regulation at the ABI, said: “It is widely accepted that the RPI model is less than perfect, but the proposal’s impact will be felt by policyholders and pension savers for decades.
“If the reforms go ahead, and given the impact for savers and the wider economy, it is vital the implementation date is later rather than sooner. Compensation by the government should also be seriously considered to avoid creating winners and losers.”
Stealth cut
Tom Selby, senior analyst at AJ Bell, said: “If these contracts were ripped up and RPI replaced with CPIH, which tends to be lower, it would effectively represent a stealth cut to people’s hard-earned retirement pots.
“Any annuities linked to RPI would also be worth less if this link was downgraded to the CPIH inflation measure.
“Anyone invested in index-linked gilts, including individuals and pension funds, would also see the value of their holdings tumble if the government applied a blanket overnight switch from RPI to CPIH.
“The big question the government needs to answer is the extent to which it will mitigate any negative impact on people with pensions and investments explicitly linked to RPI.
“One option in this regard would be to maintain a notional RPI which these contracts could then adopt, although this might mean RPI remains part of the system for decades.”
