Govt’s RPI reform could cost £122bn

Government proposals to reform the calculation of the Retail Price Index (RPI) could cost £122bn if plans go ahead to implement the changes in 2025.

The Association of British Insurers (ABI) has revealed that reform would affect savers, especially those with defined benefit pensions, as well as companies that invest in government debt linked to inflation, or index-linked gilts.

The Government and the UK Statistics Authority are closing consultations today on reforms to align RPI to the historically lower Consumer Prices Index (CPI) – including owner occupiers’ housing costs (CPIH) – with the consultation proposing that the changes are implemented between 2025 and 2030.

Even if the move is made in 2030, the latest proposed implementation date, the impact on the value of pensions and investments would only be reduced to £96bn.

Given some long-term saving products, including defined benefit pensions, are linked to the RPI measure of inflation, the ABI suggested that changing them to CPIH would significantly reduce the expected returns on these assets.

ABI director of conduct and regulation, Hugh Savill, 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.”

Commenting on the possible reforms, AJ Bell senior analyst, Tom Selby, suggested the impact of such a move would be “felt by a huge number of people in different ways”.

“There are, for example, defined benefit schemes where scheme rules mandate members’ retirement incomes rise in line with RPI,” Selby 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.

“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.”

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