UK private pensions ‘set to lose £96bn’ from switch from RPI inflation measure

Rishi Sunak’s move in spending review could result in pension holders receiving thousands of pounds less in income

The government will stop using the retail prices index measure of inflation in 2030, the chancellor has announced, in a move that will spell bad news for investors and retirees with payouts linked to it.

The RPI has not been used as an official national statistic since 2013 but it is still the figure used for returns on index-linked gilts issued by the UK government. It is also used when calculating annual increases in rail fares and student loan interest.

However, the rate has been discredited as a measure of price rises as it frequently overstates them. Instead, after a consultation that started in March, the government said it would switch to a measure in line with the current consumer prices index plus housing costs (CPIH). This stands 0.4 percentage points lower than RPI, but the gap is often wider.

The move will cut the returns paid to investors in index-linked bonds, which include pension funds, and have an impact on retirees who have been promised annual increases in their pensions in line with RPI.

The Association of British Insurers, which represents pension scheme providers, has estimated that it could cost investors and pensioners £96bn.

Sarah Coles, a personal finance analyst at the investment platform Hargreaves Lansdown, said: “This is a horrible blow for pensioners, who will pay the lion’s share of the eye-watering cost of this move.”

The consultation had mooted the possibility of the change coming into effect in 2025, but the chancellor delayed it to limit the impact on gilt holders.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

Tom Selby, a senior analyst at investment firm AJ Bell, said: “Rishi Sunak has pushed the effective abolition of the RPI inflation measure as far back as he can to ensure it is not ‘materially detrimental’ to holders of index-linked gilts.

“However, from 2030 onwards the message is unequivocal: if you are negatively impacted by this, tough.”

He added: “While the average difference between RPI and CPIH might look small at 0.8 percentage points, over time that could lead to a retirement income worth thousands of pounds less.”

Contributor

Hilary Osborne

The GuardianTramp

Related Content

Article image
Final salary pension schemes pivot to overseas stock markets
Pension Protection Fund finds funds are shifting from UK stocks to foreign shares and government bonds to reduce risk

Phillip Inman Economics correspondent

08, Dec, 2016 @7:46 PM

Article image
George Osborne's 100-year bonds get short shrift from pension funds
Investors have strongly criticised George Osborne's controversial plan for 100-year gilts, branding them a gimmick and a 'lousy investment'

Josephine Moulds

14, Mar, 2012 @6:03 PM

Article image
Council staff pensions at risk from Woodford investments
Three council pension funds have put in up to £10m in sister fund hit by suspension of flagship scheme

Kalyeena Makortoff and Julia Kollewe

16, Jun, 2019 @10:51 AM

Article image
Final-salary pension scheme shortfalls stubbornly high, advisers warn
Consultancy says funds hit by low returns from safe-haven assets face added burden from higher inflation expectations

Phillip Inman

01, Jan, 2014 @7:13 PM

Article image
Defined benefit pension fund deficit grows by £100bn in a month
Total combined deficit is now £710bn, according to a PwC report, with companies having to halt dividend payouts

Patrick Collinson

31, Aug, 2016 @11:01 PM

Article image
£30bn pension fund: we'll sack asset managers that ignore climate crisis
Brunel Pension Partnership sets 2022 deadline for investment firms to reduce exposure

Jasper Jolly

27, Jan, 2020 @12:01 AM

Article image
Bank's post-Brexit strategy hits snag as gilt buyback falls short
Threadneedle Street offered to buy back £1.17bn of bonds from institutional investors but received offers of only £1.11bn

Jill Treanor and Larry Elliott

09, Aug, 2016 @7:04 PM

Article image
UK loses triple-A credit rating after Brexit vote
Standard & Poor’s issues downgrade and pound hits 31-year low despite chancellor’s attempts to soothe markets

Jill Treanor and Katie Allen

27, Jun, 2016 @6:24 PM

Article image
Private investors halt Lloyds bid to withdraw high-rate bonds
Bank seeks to appeal against high court ruling banning move to take back bonds which paid up to 16% per year

Jill Treanor

03, Jun, 2015 @11:13 AM

Article image
Tax raid postponed as ministers rush through finance bill
Snap general election forces ministers to ditch controversial plan to slash the tax-free dividend allowance in order to ensure safe passage of bill

Rupert Jones

25, Apr, 2017 @4:42 PM