Pension savers in defined benefit schemes could lose up to 20 per cent of their income, if government reforms to the way inflation is calculated go ahead.
This stark warning comes from Insight Investment, who claim that the government could pocket around £100bn as a result.
These figures are contained in a technical analysts that Insight as submitted to the current consultation on RPI (retail price index) methodology, which is set to close on August 21.
It points out that there are still more than 10m people who benefit from DB schemes, and most are unaware of these potential changes, or the consequences it might have on their retirement income.
Insight’s analysis shows that a member of a defined benefit pension scheme who is retiring at age 65 on a starting income of £20,000 could lose in excess of £30,000 over the course of their retirement, if the way their pension is uprated each year to take account of inflation is changed.
In submitting this response to the consultation, Insight has urged the UK government and the UK Shareholders Association (UKSA) to give careful consideration to the broader economic consequences of RPI reform before making a final decision.
Insight head of market strategy Rob Gall says: “If RPI is simply aligned with CPIH — the consumer price index which includes housing costs — we believe this would significantly reduce the pension fund benefits received by end members, and may result in a transfer of wealth from index-linked gilt holders to the UK government of around £100bn.
“A fair and equitable outcome can be achieved if RPI is aligned with CPIH plus an appropriate margin to ensure that there are no resultant losers.”
Insight has worked actively to raise awareness of the implications of the proposed reform and will continue to do so ahead of the consultation closing next month.