Funds lose Court fight - In 2030 RPI will be replaced by the typically lower CPIH

OldScientist

This question has been worrying people since the change was first suggested over a decade ago (e.g. see https://www.sharingpensions.co.uk/pension-uk-annuities-rpi-basis-change.htm ) My understanding is that all existing index linked gilts will move over to the new measure in 2030 (https://ehs.org.uk/index-linked-gilts-and-the-end-of-rpi/ ). Since the payouts from the annuities will rely largely on maturing gilts, then the annuities will also switch over when the linkers do unless, as suggested above, the actuaries have included an estimate of the difference.

The one advantage of CPI over RPI is that, should it occur, deflation would probably be less pronounced (e.g. in 2009, RPI dropped to -1.4%, while CPIH was 1%) - for annuities without an inflation floor, this would at least mean that any reduction in nominal income would be lower.

OldScientist

jsinc said:

Pensions_matter_2 said:

i suppose there may always be the (slim!) chance the government dont go ahead with this, or postpone it, so may be they are waiting till nearer 2030 before changing the way providers will need to communicate (or indeed price this change in). Doesnt seem fair at all and as you say annuitants will be shafted. 

That uncertainity is why I doubt providers are even pricing the change into today's RPI quotes. But without significant collective representation, as you highlight, will be very difficult for scattered individuals to achieve any prompt resolution b/c 1) Sellers will just point to Government and/or vague contract terms; 2) Annuity purchasing market has shrunk so part of a declining group of older buyers who can be strung along with promises of litigation or legislation until it's increasingly and conveniently too late to matter to authorities.

I wonder whether the recent resurgence of inflation has made index-linked annuities a bit more attractive for those with insufficient other sources of inflation linked income. For example, at just over 4% for a single life at 65 and about 3.5% for a joint annuity with 50% survivor benefits at 65, the payout rates are now similar to or better than 'safe' withdrawal rates for the UK. In other words, there may be a larger pool of people affected by this change when it occurs.

Pensions_matter_2

I have zero floor RPI annuity income, so at least the amount will never decrease. I think it might have been fairer if they had pegged the formula to higher of CPI and CPIH. I havent checked records but wouldnt be surprised if CPIH tends to be lower than CPI (which tends to be lower than RPI under current formula).

OldScientist

Pensions_matter_2 said:

I have zero floor RPI annuity income, so at least the amount will never decrease. I think it might have been fairer if they had pegged the formula to higher of CPI and CPIH. I havent checked records but wouldnt be surprised if CPIH tends to be lower than CPI (which tends to be lower than RPI under current formula).

I'm never quite sure whether 'fair' comes in to these sorts of things - given that the UK has one of the highest fractions of index-linked debt (25%) there may be other reasons for these changes (although they were mooted well before the current inflationary episode).

There's a graph (Figure 1) of the various inflation measures at

https://actuaries.blog.gov.uk/2021/08/23/measures-of-price-inflation-rpi-cpi-and-cpih/

It looks like the expected order is RPI, CPIH and then CPI - although CPI and CPIH are fairly similar but do vary in their order.

Pensions_matter_2

That’s a useful graph. Quite a significant difference at times between RPI and the other two.

sevenhills

Pensions_matter_2 said:

That’s a useful graph. Quite a significant difference at times between RPI and the other two.

Not sure how it can be accurate, since house prices were surging ahead in 2016/17, the graph has CPI and CPIH almost the same in 2017

jsinc

OldScientist said:

I wonder whether the recent resurgence of inflation has made index-linked annuities a bit more attractive for those with insufficient other sources of inflation linked income. For example, at just over 4% for a single life at 65 and about 3.5% for a joint annuity with 50% survivor benefits at 65, the payout rates are now similar to or better than 'safe' withdrawal rates for the UK. In other words, there may be a larger pool of people affected by this change when it occurs.

Perhaps. Either way I certainly think annuities are undervalued as a retirement solution vs. drawdown in most financial discussion, including on this forum.

@sevenhills CPIH includes owner occupiers' housing costs (rental equivalence), a measure of the price owner occupiers would need to pay to rent their own home, not house prices. i.e. measuring the changing price of housing services as a place to live, rather than the price as an asset. Whether that's the best measure when houses are both a place to live and ever increasingly also a financialised asset is a matter of opinion.

OldScientist

jsinc said:

OldScientist said:

I wonder whether the recent resurgence of inflation has made index-linked annuities a bit more attractive for those with insufficient other sources of inflation linked income. For example, at just over 4% for a single life at 65 and about 3.5% for a joint annuity with 50% survivor benefits at 65, the payout rates are now similar to or better than 'safe' withdrawal rates for the UK. In other words, there may be a larger pool of people affected by this change when it occurs.

Perhaps. Either way I certainly think annuities are undervalued as a retirement solution vs. drawdown in most financial discussion, including on this forum.

I'd agree here - covering essential spending (however that might be defined!) with guaranteed, inflation linked (regardless of what it is linked to), income, whether state pension, DB pension, and/or annuity, is, I think, an important plank in a retirement plan (guarantee periods or value return can at least partially address the worry of dying shortly after buying the annuity). Even the DIY version of an annuity, i.e., building an inflation-linked bond ladder currently gives a payout rate of about 3.3% over 30 years. Of course, the annuity rates haven't been this good for quite some time. Mind you people have been commenting on the 'annuity puzzle' (i.e., the reluctance to annuitise retirement savings) for at least 4 decades.