On Wednesday, the budget is expected to announce a change in inflationary measures, which will have significant consequences for British pensions.
In anticipation of the budget, Jos Vermeulen, senior pension strategist at Insight Investment, said: "A seismic change in pensions is expected, and if left unchecked, it could negatively affect the pension savings of millions of ordinary members of the pension system and the levels of financing of pension schemes. More than 10 million participants in defined benefit pension schemes will be affected by the proposed changes to the underlying retail price index (RPI) calculation."
If the RPI (retail price index) is subject to a simple correction, as currently proposed, the value of the associated RPI may drop to 20%.
"It would also lead to the transfer of wealth from £90 billion to £120 billion from holders of bond-related indexes - predominantly British pension funds and insurers to the UK government. Pension funds were indebted to reduce risk by hedging long-term liabilities, which ultimately strengthened the UK's financial stability. They did so in good faith, based on a clear and consistent message that the RPI calculation methodology will not change." Vermuelen added.
A proposal to reform the retail price index, in bringing it into line with the consumer price index, including housing costs for homeowners, will be considered on March 11.
The government seems to have decided to make these amendments to the basic RPI calculation. The proposal is to align the consumer price index, including housing costs for homeowners, based on the average difference between the two inflation rates since 2010, which will lead to a decrease in the RPI yield by 1% per year.
Attention will be paid to the timing of the change, not the economic impact.
"We urge all UK pension funds, insurers, consultants and asset managers to engage with politicians now to organize the upcoming reform.
With your help, we can protect the value of assets and retirement income on which millions of people depend now and for decades to come," was the appeal of the UK government.
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