The Government is consulting on a move which could effectively axe the RPI measure in favour of CPIH.
RPI, an older measure, is used for the indexation of many pensions and tends to be higher than CPIH, boosting pension income as a result.
The PPI has published research here on the damage the changeover could cause. The change may take place between 2025 and 2030, depending on the Government’s decision.
The PPI research backs up previous analysis by Insight Investment. They both suggest that while the change appears superficially small the loss to retirees could be severe.
According to the PPI if RPI is ditched:
• A 65 year old pensioner in 2020 could get up to 21% less per year in a DB pension by age 90
• A 65 year old man with an average life expectancy of 86 would enjoy a DB income under RPI uprating of around £6,300pa. This could drop by 17% to £5,200pa if the change took place from 2025, or by 12% to £5,500pa, if the change took place in 2030.
• A 65 year old woman with average life expectancy of 88 would see DB income under RPI uprating of around £6,200pa. This could drop by 19% to £5,000pa if the change took place from 2025, or by 14% to £5,300pa, if the change took place in 2030.
• Women will be more affected than men due to longer life expectancy
No decision has yet been taken on axing RPI but Tom McPhail, head of policy at savings platform Hargreaves Lansdown which has 1.27m customers, said those pension savers with RPI indexation should be allowed to keep the benefit.
He said: “Anyone who has joined a pension scheme or bought an annuity expecting to receive RPI linked increases to their income, should continue to receive those benefits in line with the contract they bought into. Arguing that they’ll still receive an RPI-linked benefit but then changing the definition of what RPI means, is a bit of Alice in Wonderland logic.”
He said rather than ditching RPI, the government could continue to calculate and publish a ‘legacy’ RPI for existing contracts, such that anyone receiving contractual benefits today could continue to enjoy the current calculation methodology. They could use ‘RPI 2’ for all contractual obligations entered into after a specified change date.