It doesn’t matter if you are an employer or a DB pensioner or a DC saver, the Government’s decision to move from RPI to CPIH in 2030 will almost certainly impact you. The winners in this will be the Treasury, and in as much as the Treasury gets its money from tax , the tax-payer. The move to CPIH relieves the Treasury of obligations to pay out on RPI linked gilts (linkers) after 2030 and that will feed through to a happier Treasury and sadder pensioners.
But how will all this evidence itself to the likes of me and you?
- Some pensions will be smaller than expected from 2030. CPIH typically is lower by 1% pa than RPI so this is like getting a lifetime paycut of 1% pa. That will typically add up to around £8,000 per person less – from their pension.
- This will no doubt be reflected in transfer values which will reflect lower future liabilities and so will be smaller.
- If you are in a DC pension and in the lifestyle stage (typically within 10 years of when the scheme expects you to retire) you may well be invested in an annuity protection fund which will be invested in linkers, the value of your linkers will fall, if they are expected to pay RPI after 2030 (that’s because they won’t)
- If you are an employer who has been investing in linkers to protect yourself against your RPI liabilities, you are going to find that a large amount of the price you paid is wasted, you won’t get the RPI linkage, you’ll get 1% pa less, meaning that you’ve overpaid for your insurance.
- Whether you are an employer, or a pensioner or a DC saver, who is expected to be out of pocket over this, tough. You’ve been mis-sold gilts as RPI linkers if their duration is beyond 2030 and that’s all there is to it.
On top of all this of course are changes to the way prices go up and they are likely to continue to rise as they always have. You will simply lose some ability to keep on top of price inflation.
A lot of angry people…
People who buy gilts expect to be buying into a risk-free security. But the linker isn’t risk free, it can mutate from RPI to CPIH at the swish of Rushi Sunak’s pen. This risk is not made clear to people who are buying linkers – either by Government or by intermediaries like the firms setting up “de-risking strategies” – the consultants and asset managers selling Liability Driven Investment (LDI). Already Insight investment management has been protesting about what has happened , presumably on behalf of their clients. Their clients may be angry at more than Government.
I am a pensioner and I will take a haircut on my pension in my 70s , 80s , 90s and hopefully beyond (I’m not doing all this keep-fit for nothing). I am pretty cross as I had been banking on my gold plated increases and now discover I’m getting chrome instead. Not much sympathy for me perhaps, but the real price of this downgrade in indexation will be paid by people who have pensions due to them.
Are we right to be angry?
Well this change has been well flagged, it has been consulted on and frankly this is not the worst option presented to us (we could have lost RPI linkage in 2025). The Government can move the goalposts on these things as they like and this is a well-defined “political” risk.
What is more worrying is that the strategies that have been pursued by Government departments and agencies, most notably DWP and tPR have been to promote the lockdown of liabilities by matching them with assets. This means buying linkers at inflated prices because of another Government policy (QE) and now finding that those prices were doubly inflated as the things purchased don’t do what they say on the packet.
People have every right to be angry if they find themselves in these duff gilts through no choice of their own and I expect trustees promoting default funds stuffed full of linkers for those in the final years of lifestyle will have a bit of explaining to do.
But in the end , Government can and will do what it wants. You may think this is a God -damned shame – but you voted them in.