As we say RIP to RPI: Here’s How It Will Affect Pensions

Chancellor Rishi Sunak announced in his Autumn Spending Review that the retail prices index (RPI) will be effectively abolished in 2030.

While this is later than was previously assumed, his predecessor having pushed for a faster change, the implications are still important to savers and investors.

RPI measures the rising price of goods and services but has been superseded by more accurate measures implemented by the Office for National Statistics (ONS), including Consumer Price Inflation (CPI) and CPIH – a new additional measure of consumer price inflation including a measure of owner occupiers’ housing costs. From 2030, the UK Statistics Authority (UKSA) will change how RPI is measured – matching it to CPIH’s methodology.

This effective abolishment of RPI has several implications. RPI has, over much of the last decade, measured higher than CPI or CPIH. For instance, at the time of writing, the most recent data from the ONS for October 2020 has RPI at 1.3%, whereas CPIH, considered the most accurate index, was just 0.9%.

Rail fares, student loans, and utility bills such as broadband or mobile phones are all linked to RPI, with annual hikes priced off of RPI, so its replacement with CPIH will be good news for consumers’ wallets when the change happens.

But the news is bad for some pension holders. The Pensions Policy Institute estimates that some 64% of final salary schemes are uprated each year by RPI . While these pensions will continue to be uprated each year from 2030, it will be by the CPIH measurement.

In aggregate between 2009-2019 RPI increased by 30.2% while CPIH increased by 22.7% according to the ONS. On a pension portfolio worth £100,000 this is a £7,500 difference – no small change. Losing out on investment compounding would make these basic sums look even worse.

Whether or not you may be affected depends on the pension you hold. The change will mainly affect holders of defined benefit (DB) pensions, so-called ‘final salary schemes.’

What else will be affected?

Index-linked gilts will also be hit. Ironically enough the price of these bonds actually soared on the news from the Chancellor, as markets had originally factored in an earlier change to the measure.

But in the long term, these bonds will deliver less income for holders, so considerations should be made whether they’re worth keeping in an investment portfolio. The value of such bonds could also steadily fall as the deadline approaches and investors divest themselves from a less attractive asset.

Some annuity holders will also be affected as certain annuity products are also uprated by RPI currently. These products are, however, increasingly unusual thanks to the advent of pension freedoms. But any holder of such a product will be subject to lower pay out increases from 2030.

If you think any of these may affect you or your portfolio, don’t hesitate to get in touch and discuss your options.