Up to £80 billion ($104.4 billion) could be wiped from defined benefit assets if the U.K. government goes ahead with plans to align inflation measures, the Pensions and Lifetime Savings Association warned.
The government and the U.K. Statistics Authority has been consulting with the industry since March on aligning the retail price index with the consumer price index, known as the CPIH. The change could be made by 2030.
In its comment on the consultation paper, the PLSA said DB funds will be significantly impacted by the change as the RPI rate is "structurally higher" than the CPIH by an average of about 1% a year.
With an estimated £470 billion invested in index-linked bonds, U.K. pension funds would see the value of these allocations reduced by £60 billion if the change is made in 2030, and be £80 billion if the alignment goes ahead in 2025. Deficits will need to be plugged by contributions by sponsoring employers, the PLSA warned.
The change would also negatively impact on participants. A 65-year-old man in 2020 could see his yearly average DB income fall by 17% if the changes come in 2025, while a woman of the same age could lose up to 19% of her benefits under the same circumstances.
The PLSA said the problem could be solved by transitioning away from RPI in a "fair and equitable way," by adjusting index-linked gilts to CPIH plus an adjustment that reflects the expected shortfall due to the move away from RPI. The solution is referred to in the U.K. retirement industry as "CPIH plus spread," the PLSA said in its response. Another option is for the government to consider paying any future lost income to holders of index-linked gilts upfront.
A working group should also be established to help with the change, the PLSA said.
"The decision to develop a more robust measure for inflation is the right one but the proposed methodology risks billions of pounds in pension assets," Tiffany Tsang, senior policy lead for LGPS and DB, said in a news release. "Pension schemes have made RPI-linked investments in good faith, and under the guidance of the regulators, to prudently fund pension benefits. They should not face shortfalls as a result of the changes."
The PLSA represents more than 1,300 retirement plans with 20 million participants and £1 trillion in assets.