Links to household cost indices could ease pension uncertainty, says PPI

Savers are facing increasing uncertainty around their pension amid current economic conditions and inflationary reform, although linking benefits to household cost indices (HCI) could ease this, according to analysis from the Pensions Policy Institute (PPI).

The PPI found that recent spikes in inflation have increased the uncertainty of future pension costs and benefits, with concerns that private sector defined benefit (DB) pension scheme members whose benefits are capped may be particularly hard hit by high inflation.

Further uncertainty may also be stemming from the government plans to reform the retail price index (RPI) and Consumer Prices Index including owner occupiers' housing costs (CPIH), with a judicial review of this change recently rejected by the High Court.

It also argued that the growing gap between RPI and CPI is generating increased uncertainty about how both DB schemes and their members may be impacted by the reforms, and making planning for mitigation more complex.

Savers are also facing significant economic changes amid the cost-of-living crisis, meaning that DB pensioners have less confidence as to how their current and future income will meet living costs

However, the PPI clarified that indexation should be simpler for individuals to understand in the future, as RPI‐linked prices will continue to rise at the same rate as their pension, subject to caps, once the methods and data of CPIH are brought into the RPI in 2030.

There should also be a stronger connection between increases in prices and increases in pension income in future, as most prices are linked to CPI or RPI and these will increase at the same rate in future.

According to the PPI, this could also help make price indexation more relevant and easier to understand, especially if most future prices and benefits are eventually solely linked to CPIH as the lead measure of inflation.

In addition to this, the PPI suggested that HCIs, which are currently under development, could help ensure that pensioner income better reflects changes in future, with subsidiary indices for different types of households, such as retired people.

While these indices are currently under development, the PPI suggested that they are could be used to set increases in state and private pensino payments in future in order to ensure that people with different circumstances can continue to meet their needs when prices rise.

PPI head of policy research, Daniela Silcock, commented: “Increases in the cost-of-living have hit pensioners hard, especially those on lower incomes.

“Economic changes such as those we are currently undergoing, mean that pensioners have less certainty about how their current and future income will meet living costs. There are already signs that pensioners are and will continue to struggle to meet day-to-day needs.

“One potential solution is to explore whether state and private pensioner benefits should be linked to the Household Cost Index for retired people, which specifically measures changes in the prices of goods and services used by retired people.

“On a positive note, in the future, most indices will rise at a similar rate, meaning there should be fewer financial difficulties for people arising from prices and income increasing at different rates.

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