Two years ago, Rishi Sunak announced a seemingly innocuous change to the way that inflation was measured.

In a low-key statement, the former chancellor said he was changing the definition of the Retail Prices Index (RPI) at the behest of the UK Statistics Authority. Sunak said he’d be making it identical to CPIH, the Consumer Prices Index adjusted for housing costs, with the change coming into force from 2030.

Considering that RPI has long been discredited as a measure of the cost of living because of a methodological flaw in the way it is calculated, on the face of it, the decision seemed sound.

However, the government recently found themselves in the High Court over the move which, it turns out, could cost your clients thousands of pounds of income over the course of their lifetime. Read on to find out more.

Final salary pensions could reduce in value under the change

If you have clients who have worked for a large employer during their career, it’s likely that they will benefit from a final salary pension when they come to retire.

For decades, final salary pension schemes provided gold-plated benefits to members – a guaranteed income on retirement, typically rising annually by the cost of living and paying benefits to a spouse on death.

Many pension schemes use the RPI measure to determine the increase in benefits each year. However, under the former chancellor’s plans, schemes would have to use the CPIH measure which, crucially, typically comes in at around 0.8% to 1% lower than RPI each year.

As a result of this proposed change, the BT, Marks & Spencer and Ford UK pension schemes have begun a legal challenge in the Royal Courts of Justice.

The pension funds are trying to reverse the decision to redefine RPI from 2030 or, as they put it, “stick an RPI label on a completely different index”.

For example, the BT pension scheme, which has 275,000 members, has previously calculated it would be £1 billion worse off because of the formula change.

So, why does this matter to your clients?

Failure to overturn the former chancellor’s decision could cut your clients’ pensions

The seemingly simple change to the measure of inflation could cost workers with a final salary pension thousands of pounds over their lifetime.

Money Marketing reports that pensioners will see a 4% to 9% cut to their total pensions over the rest of their lives, with women worst affected because they live longer. This is because CPIH typically grows significantly more slowly than RPI as currently formulated.

The complainants say that “this affects approximately 82,000 members of the [BT] scheme alone and the decision will wipe £2.8 billion from the aggregate present value of their pensions.”

They argue that all members of pension schemes where annual pension upratings were linked to RPI will lose out.

The hit to BT pensioners, averaging £34,000 each, is far higher than BT’s initial estimate of £1 billion, or about £12,000 each.

Professional Pensions share two examples of how final salary pension holders could benefit if the High Court reverse the former chancellor’s decision:

• A 65-year-old retiring now with an RPI-linked pension of £5,000 a year would ultimately gain around £15,000 over their lifetime.
• A 55-year-old retiring in 10 years’ time with an RPI-linked pension of £5,000 a year would gain even more – around £32,000 over their lifetime.

As you can see, many of your clients with final salary pensions could be affected by this change if the judicial review fails. It could leave many with a lower income in retirement – up to 9% over their lifetime in some cases.

A judgment is expected in the autumn, so we’ll update you then.

Get in touch

We specialise in helping clients to achieve their financial goals, such as retiring early, helping their children financially, and enjoying the lifestyle they desire.

If you have clients who would benefit from advice, we can help. Email info@blueskyifas.co.uk or call us on 0118 987 6655.