Potential changes to the way inflation is measured could have far-reaching consequences for both pension funds and pensioners, according to the National Association of Pension Funds.
Plans to improve the Retail Prices Index were published for consultation by the Office for National Statistics yesterday. The ONS is consulting on the formulae used in parts of the RPI calculation and the measurement of private housing rental prices.
It aims to bring the RPI more into line with the Consumer Prices Index which became the statutory minimum for increases and revaluation in both public and private sector defined benefit pension schemes from January 2011.
Daren Philp, the NAPF's policy director, said: 'Changing the way RPI is calculated could have far-reaching consequences for both pension funds and pensioners.
'Pension funds are big investors in government debt so any changes to index-linked bonds could have major impacts on those investments. A shift in RPI could also affect the amount by which the pensions being paid to retired workers go up each year, and change the overall funding position of the pension scheme.'
Malcolm McLean, a consultant at Barnett Waddingham said the planned changes could be seen as a 'back door' way for the government to save money.
'It would be ironic to say the least if the impact of any such changes were to reverse the situation whereby members of private pension schemes which use RPI can expect to receive generally larger inflation increases than others who now receive lower ones based on the CPI,' he said.
'This constant moving of the goal posts illustrates the difficulty scheme sponsors have in budgeting and cost control and for members in making their retirement plans with any degree of certainty as to their likely levels of pension income.'
Bringing the RPI and CPI broadly into line could also bring into question whether it was necessary to have two separate inflation indices moving forward, he added.
Zoe Lynch, a partner at Sackers, said the changes were likely to reduce pensioners' future benefits and, as a result, the liabilities for pension schemes which had retained RPI as the measure of inflation.
'Before the statutory switch to CPI all occupational pension schemes used RPI for increasing pensions in payment and during any period of deferment,' she explained.
'Those schemes which specified RPI in their rules retained this measure of inflation, while schemes which referred only to the statutory requirements moved to CPI automatically. It is estimated that the switch to CPI knocked 15% off liabilities for some schemes, depending on their membership and liability profile.
'These changes to RPI are likely to make RPI more like CPI. This is likely to reduce increases to pensions in payment in the future and thus scheme liabilities for the schemes which retained RPI.'