Changes to the way that inflation is officially calculated could cost some pension holders “billions”, a challenge in the High Court has warned.

The challenge comes from representatives of the pension schemes of BT, Marks & Spencer and Ford UK and is attempting to block efforts by the Government to alter the way the Retail Prices Index (RPI) measure of inflation works.

What is RPI?

The Retail Prices Index – or RPI – is one of the oldest existing measures of inflation used by the UK Statistics Authority (UKSA) and Office for National Statistics (ONS) to calculate price changes in the economy.

It is however widely seen as an inferior measure, having since been superseded firstly by the Consumer Prices Index (CPI) and now Consumer Prices Index including Housing costs (CPIH).

CPI is often the most quoted measure in the media when we see news stories about rising inflation and such. But CPIH is generally perceived by statisticians as the most accurate measure of prices and the impact on households as it includes housing costs which form a large part of many people’s budgets.

Despite this, RPI is still used by many organisations to calculate price changes. This includes everything from student loan interest payments to rail fares, mobile phone, and broadband contract prices.

Why is the Government changing RPI?

RPI is widely seen as an inaccurate measure, often overestimating the true level of price inflation in the economy.

The impact of current high inflation levels is being exacerbated by RPI inaccuracy. For instance, in June the Government announced it would be capping student loan interest rate rises, as the RPI measure was leaving students facing a 12% rate on their debts. Instead, it is capping the rate at 7.3% to protect graduate incomes from greater financial pressure.

Instead of simply abolishing it, which would be a complicated process with many organisations reliant on the index, the Government intends to change the way it is calculated to align it with CPIH.

This would have the effect of softening the impact of the measure while not getting rid of it entirely. The change is set to take effect by February 2030.

High Court challenge

Now however, this decision is being challenged through the courts by the above-mentioned pension schemes.

Those schemes argue that changing RPI to match CPIH will costs the schemes, and their members, billions in lower returns.

These schemes see their values uprated by the rate of RPI each year and could wipe out valuable rises for members. For the BT scheme, for instance, some 82,000 members will see around £2.8 billion in value wiped out by the change, costing each member around £34,000.

The case also argues that the holders of £90 billion-worth of Government RPI-linked gilts will lose out in rises as a result. Pension schemes would be affected as these RPI-linked gilts form a large proportion of their holdings. The Government says it doesn’t intend to offer any compensation to such gilt holders.

Overall, the case argues, RPI-linked pension holders will see 4-9% of their pension values wiped out by the change.

How could it affect me?

While it is uncommon for most pension schemes to have RPI-linked increases, it is still possible and worth checking. It is also worth ensuring that portfolio holdings aren’t overly exposed to RPI-linked assets such as gilts, although the readjustment in value for these will have largely already taken place.

If you’re unsure of whether your pension, or any other assets, might be affected by the changes, don’t hesitate to get in touch with us to discuss.