Alternative RPI could hit pensions Millions of people saving into private sector pensions could still face cuts to their retirement income as the door opens for schemes to use a new, less generous inflation measure. Currently, many schemes in the private sector use the retail prices index (RPI) to uprate their members" income each year and ensure it broadly keeps pace with rises in the cost of goods and services. But this week the Office of National Statistics (ONS) announced that from March it would make available a new inflation measure, the RPIJ, expected to run at 0.5-1 percentage points lower than the current RPI. The move came as the national statistical body decided against a much-expected revamping of RPI, considered a flawed measure, to bring it into line with the consumer prices index, which tends to run at a lower level. "It isn't all great news for pensioners because even though RPI was left unchanged, RPIJ will be available in future as an alternative to RPI," said Zoe Lynch, partner at Sackers, the UK's leading pensions law firm. RPIJ will run at a much lower base than RPI, perhaps as much as one percentage point. This will mean less income in real terms. A switch to the RPIJ would translate into thousands of pounds less income over the course of a retirement, said advisers. Given the potential savings, pension schemes would be under pressure to link benefits to the less generous measure. "Schemes which explicitly link pension increases to the retail prices index may have been able to resist moving to the consumer prices index on the basis of name alone," John Broome Saunders, actuarial director of Broadstone Corporate Benefits, pointed out. Pensions linked to RPI are worth on average 25 per cent at retirement more than those linked to CPI, according to Aon Hewitt. However, we now have old RPI and new RPI - which will force trustees to choose either new RPI, which will lead to lower benefits for members, or old RPI. Nigel Green, chief executive of the deVere Group, suspected that the decision not to effectively reduce RPI would be likely accelerate the number of pension schemes that switch indexation from RPI to CPI. "Should this occur, it would mean that despite the retention of the RPI calculation, millions of pensioners will still suffer reductions to their retirement incomes," said Green. Pension lawyers said this week that schemes would not be able to switch from old RPI to new RPI if the existing index link was "hard-wired" into the scheme rules. However, there could be cases where the rules were less clear cut. "The rules might contain wording along the lines of "RPI or any replacement index" or they might refer to something like "RPI or such other index as the trustees consider appropriate," said David Robbins, a consultant with Towers Watson, the actuarial firm. Trustees will want to review their rules and get legal advice where the position is not straightforward.