Some DB schemes are overpaying transfer values by up to 10 per cent by not updating transfer terms to reflect the impact of RPI reforms according to calculations by Hymans Robertson as it warns that schemes should revisit their terms.

It is now known that RPI will trend down to CPIH from 2030 following the Government’s announcement last November, however, market implied RPI does not reflect this expectation with no noticeable trend down predicted in 2030. This indicates that investors are currently paying a significant premium to hedge inflation, potentially of around 0.5 per cent per annum claims the leading pensions and financial services consultancy.

Commenting on the implications for DB Schemes of market implied RPI, Alistair Russell-Smith, Head of Corporate DB, Hymans Robertson, says:

“Transfer values are often linked to market implied RPI. They do sometimes deduct an ‘inflation risk premium’ from market implied RPI, but it is rarely as large as 0.5 per cent per annum. If a scheme is currently using market implied RPI to calculate transfer values, it is arguably overstating the transfer value for RPI linked liabilities by around 10 per cent.

“We predict that with DB pension scheme increases most commonly linked to RPI, this could have significant implications for future and current pension savers. To ensure they are not currently overpaying, schemes should revisit their terms and transfer value bases as a matter of priority, and make certain that the RPI assumption is adjusted to take account of the impact of RPI reforms.”