'No compensation' for RPI change could push employer contributions up

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The retail price index will be aligned with the consumer price index including owner-occupiers' housing costs from 2030, the government has confirmed but has resisted calls for compensation to holders of index-linked gilts, leaving schemes and employers to pick up the bill.

RPI is viewed as flawed in its methodology by the UK Statistics Authority, which has been calling for its demise for several years. CPIH has been the Office for National Statistics’ lead measure of inflation for three years. It is on average about 0.8% lower than RPI.

"The vast majority of index-linked gilt holder respondents called for further mitigation for index-linked gilt holders in the form of compensation. The government will not offer compensation to the holders of index-linked gilts," the Treasury said in its response to a consultation on RPI reform.

The news comes as a blow to defined benefit schemes that have invested heavily in matching assets and liability-driven investment strategies. Although some schemes will see not just their assets but also their liabilities decrease in 2030, there is considerable variation across schemes.

The Pensions Policy Institute has said that overall, changing RPI to CPIH will increase DB deficits, potentially requiring higher employer contributions. The switch to CPIH will reduce the value of DB pension funds' holdings by about £60bn, and the PPI added that “there will also be material impacts from investments in other RPI-linked assets". 

The total value of DB scheme assets currently invested in index-linked bonds is around £470bn. In 2019, 29% of private sector DB scheme assets were invested in index-linked bonds. 

Nigel Peaple, director of policy and research at the Pensions and Lifetime Savings Association, said the PLSA is disappointed that the government has chosen to "disregard the detrimental impact this move will have on both savers’ retirement incomes and on the assets of UK pension schemes". 

The change will "raise the risk of insolvency for employers as they seek to address the shortfall in funding of their workplace pension schemes", he warned.

“The PLSA has advocated for solutions which mitigate the enormous cost to schemes, employers and savers, either through one-off payments or by technical measures that better reflect the higher value under the current RPI measure. The government says it will keep the occupational pensions sector under review. We will certainly continue to press our case against this deeply unfair decision," he added.