CPI adjustments used for pension redress calculations
RPI will be aligned with CPI (or strictly speaking with CPIH) from 2030. The long-range forecasts that we use price this in and the closer one gets the more it affects the forecasts. This means that the FCA methodology (FG17/9), used to price CPI liabilities relative to RPI, need updating periodically because of the passage of time.
The FCA provide us with a table of margins split between the pre-retirement period (from 1-40 years) and retirement ages (principal ages 55 – 75). These margins were first updated 1 April 2021 (but applied from 1 January 2021). These margins have now been updated for calculations from 1 April 2022.
Our analysis shows that this change to CPI adjustments gives rise to small increases (1%-1.5%) in the capital value of the pensions that are linked to CPI, but we observe larger increases (~3%) for younger members e.g. where there is 20 years or more left to retirement. The new adjustments give rise to higher values due to a smaller differential applied to RPI from 1 April 2022.
Users of our Congruent CalculationTM platform will be able to perform pension redress calculations using the new FCA adjustments.