RPI to CPIH - pension schemes provide challenge to government

by John Wilson   •  

It has been widely reported that the trustees of some of the UK’s largest defined benefit (DB) pension schemes (BT, Ford and M&S) are seeking a judicial review of the government’s decision to make changes to the calculation methodology of the Retail Prices Index (RPI), so that it will be aligned with the Consumer Price Index including owner occupiers’ housing costs (CPIH) from 2030.

According to the reports, the trustees of these pension schemes, which represent nearly 450,000 members and £83 billion of assets:

  • believe that the decision could have far-reaching implications that have not been fully considered; and
  • claim the RPI to CPIH switch would mean unfairly lower retirement incomes for final salary pensioners and especially women who, on average, live longer than men.

Noting that CPIH tends to be around one percentage point lower than RPI, the impact of the prospective reform on the value of RPI-linked assets held by pension schemes is also highlighted. It is understood that, under the reform, no compensation will be paid to holders of RPI linked assets.

Press reports have cited research by Insight Investment stating that more than ten million pensioners will be poorer in retirement as a result of the change to align RPI with CPIH.

These judicial review proceedings should not be confused with the also well reported RPI/CPI cases that have occurred in recent years. In these cases, trustees and employers have sought clarification on the correct measure of price inflation for increases to pensions in payment under the rules of their schemes. In most of the cases, schemes that were increasing pensions in line with RPI have been forced to stick with that measure of price inflation for their increases to pensions in payment.

That said, like the above cases, the impact of the government’s decision to align RPI with CPIH from 2030 will be scheme-specific. It is not necessarily good news for employers (reduction in liabilities) and bad news for members (reduction in pension benefits) because the assets of pension schemes as well as their liabilities need to be considered, and many schemes have already hedged inflation risk.

In the judicial review proceedings commenced by the trustees of the BT, Ford and M&S schemes, it is contended that DB schemes will be impacted negatively because:

  • the changes will result in lower pension payments and lower transfer values for members; and
  • the UK Statistics Authority’s (UKSA) proposals, which the government accepted, to bring the methods and data sources from the CPIH into the RPI, are likely to weaken schemes’ funding positions.

Importantly, the scope of judicial review is limited and the court’s role is to review the process by which the decision (to align RPI with CPIH) was reached. However, if the trustees succeed then the government’s decision could be declared unlawful, or quashed. The consequence of this is that the UKSA would then need to re-consider its proposals.

Further reading

Not on the high street

by Angela Burns   •  

Dashboard Identity – how high is the bar?

by Colin Wheeler   •  

Back to the future

by Cyril Gaffney   •  

More Insights?