RPI changes could hit pensions funding by up to 10 per cent

The actuarial firm claims the impact of the Office for National Statistics’ reforms announced on September 4 could swing liabilities by as much as 10 per cent.

It is urging schemes to take action now, by setting consistent accounting assumptions for RPI and the consumer price index to avoid unwanted volatility

Under the proposals, RPI will essentially become the housing variant of the CPI (CPIH) from 2030 at the latest.

CPIH is expected to be around 1 per cent a year less than the current RPI, a huge difference over the lifetime of a pension. This means that defined benefit scheme members with RPI-linked increases can expect to get lower pensions from 2030 than they otherwise would have had.

While a net financial gain is expected if the scheme increases are mainly RPI-linked and this is only partially hedged, schemes are likely to suffer a net financial loss if they are mainly CPI-linked and RPI instruments are in place to hedge this. 

LCP urged sponsors to factor this into all their decisions, particularly if they are involved in any significant pensions action – for example, buying or selling of index-linked gilts or similar swaps, buy-ins and buyouts, changing the index used for pension increases, transfer value or pension increase exchange exercises, and long-term journey planning.

Actuarial valuations, company accounting, and long-term funding targets will all be impacted, while buy-in and buyout insurers and consolidators may eventually charge less to take on RPI-linked benefits.

Phil Cuddeford, partner and head of corporate consulting at LCP, said: “The RPI reforms will introduce big risks and opportunities. With a potential change to the funding position of plus/minus 10 per cent, the change will be huge good news for some and huge bad news for others.

“Regardless of the impact for each scheme, sponsors who engage now will be best insulated from future shock.”

Mr Cuddeford added: “As year-end approaches, it is important that sponsors keep in mind the upcoming inflationary changes. The switch may be some way off but, given that we know it is coming, it would be foolish not to factor this into any decisions being taken now.”