Inflation shake-up ‘kicked down the road’ to 2030

A planned inflation shake-up will not be put in place before 2030.

Chancellor Rishi Sunak ruled out implementing the plans before 2030, but pensions industry bodies warned the impact for retirement savers would still be felt for decades.

The changes, affecting pension holders among others, can legally and practically be made by the UK Statistics Authority (UKSA) in February 2030.

They centre around reforming the retail prices index (RPI) measure of inflation, which is linked to products such as investments and pensions.

The effects of this change will be felt for decades, and the later implementation date will help to mitigate the impact on savers and policyholders

Concerns have been raised that the way RPI is calculated means it is likely to overstate inflation.

The more favoured method for calculating inflation is the consumer prices index including owner-occupiers’ housing costs (CPIH).

It was designated a national statistic in July 2017.

Views were sought about whether proposed RPI reforms should be implemented at a date other than 2030 and, if so, when between 2025 and 2030.

While it has been confirmed that changes cannot be made until 2030, pensions bodies warned savers will lose out over the longer term while some firms could risk going bust.

This won't just affect those who are already retired

Hargreaves Lansdown said nearly two-thirds of private sector defined benefit schemes link rises in pension income directly to RPI, so switching to a lower measure could mean lower incomes in retirement.

Holders of pensions annuities with index-linked RPI guarantees also risk seeing their retirement incomes rise more slowly after 2030, it said.

Yvonne Braun, director of long-term savings and protection at the ABI, said: “We are pleased the Government has opted to delay the implementation of the reform of the calculation of the retail price index to the last possible date of 2030.

“The effects of this change will be felt for decades, and the later implementation date will help to mitigate the impact on savers and policyholders.”

Nigel Peaple, director of policy and research at the Pensions and Lifetime Savings Association (PLSA), said: “We are disappointed 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, which will reduce the value of pension schemes’ investments by an estimated £60 billion, will also raise the risk of insolvency for employers as they seek to address the shortfall in funding of their workplace pension schemes.”

Steven Cameron, pensions director at Aegon, said: “While the Government and its statisticians may correctly argue that CPIH is a more robust measure of actual increases in the cost of living, this is unlikely to appease those in defined benefit pensions who’ll see this as losing out on what they believed they were entitled to.

“And this won’t just affect those who are already retired. Anyone in a defined benefit pension considering taking advice on transferring to a defined contribution pension is likely to see the transfer value offered cut to reflect lower future increases had they stayed in the scheme.”

I will be unable to offer my consent to the implementation of such a proposal before the maturity of the final specific index-linked gilt in 2030

Mr Sunak wrote a letter to Sir David Norgrove, chairman of the UKSA, which was published on the gov.uk website.

The Chancellor said: “Having considered the responses submitted to the consultation, I am informing you and the board that while, like my predecessor, I see the statistical arguments of the board’s intended approach to reform RPI, in order to minimise the impact of UKSA’s reform to RPI on the holders of index-linked gilts, I will be unable to offer my consent to the implementation of such a proposal before the maturity of the final specific index-linked gilt in 2030.

“After this specific index-linked gilt has matured, the UKSA board can implement changes to RPI unilaterally.”

David Gibb, a financial planner at Quilter, said some people will “breathe a sigh of relief” that changes have been blocked until 2030.

He said: “In particular the owners of Government-issued index-linked gilts, who are predominantly pension schemes, will be able to hold their current gilts to maturity without fear of revaluation.

“Similarly many defined benefit pension schemes pay an income that is linked to RPI. As pension schemes are, by definition, a long-term product, just a small tweak in the methodology for increasing payments can have a huge impact on the value of the pension.

“For now, this has been kicked down the road and that should help give people time to plan appropriately.”