RPI surprises

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Quite big news out last week on the future of RPI, in DB pensions-land, amid everything else that’s going on. I’ve seen a variety of conflicting takes on the announcement, but clearly has implications for DB schemes. Here is a helpful reminder of some of the recent background context on the long-running issues with RPI.

What happened last week?

– In contrast to predictions of no change, the much-maligned “RPI formula” could be replaced by that in CPIH from 2025

– If change is made, this would reduce RPI, making future pension payments lower, and hence lowering the present value of future benefits.

– Would also reduce future payments from index linked gilts (markets have already moved to price in some change)

– Date and methodology of change subject to consultation next year

– Will impact funding, buyout, journey & hedging position for DB schemes, possibly substantially (depends on multitude of factors: hedging level, CPI liabilities etc, effects will be quite different for diff schemes)

– Reduces difference between RPI and CPI linked future benefits, so reduces impact of an overall change of benefits from one measure to the other (although reducing the impact of such a change may in theory make it more palatable)

Good example of the need for joined up activity between actuary & investment consultant to get on top of impact & help trustees best react to implications. Clearly is a benefits and funding issue, but may also affect journey plan to buy-out and the investment returns needed. Interplay with LDI hedging also key.

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