The PLSA says that merging the RPI with the Consumer Price Index (CPIH) could see pension schemes up to £80bn worse off.
The Association of British Insurers also issued a warning today that killing off RPI as a separate measure, often higher than CPI, could cost pension savers up to £122bn.
The PLSA warning forms part of the PLSA’s response to the Treasury and UK Statistics Authority’s consultation paper on reforms to RPI.
The trade body says that Defined benefit (DB) pension schemes will be hit if the government decides to go ahead with the change because the RPI rate is “structurally higher than CPIH” by an average of around 1% per year.
The body estimates that at present £470bn is invested in index-linked bonds. The Pensions Policy Institute (PPI) says a switch to CPIH without any mitigating steps would reduce the value of these investments by £60bn if made in 2030 and £80bn if done in 2025.
Employers will have to make up the shortfall via increased contributions to close the increase in scheme deficits, says the PLSA.
In addition, the PLSA has warned that, depending on their age and the timing of the change, individual pension scheme members will lose an average of 4-9% of their total lifetime pension income.
A man aged 65 in 2020 could see a drop in his yearly average DB income by as much as 17% if changes are made in 2025 and a woman of the same age could see her yearly average DB income drop by 19%, also if changes are made in 2025.
According to the PLSA this is because the level of annual inflation protection will be lower in future under a CPIH-based methodology compared to the current RPI-based approach.
The PLSA wants to see a transition away from the use of RPI in a “fair and equitable” way by adjusting index-linked gilts from RPI to CPIH plus a “transparently-calculated” adjustment reflecting the expected long term average future income of RPI over the new inflation measure, the so-called “CPIH + a spread.”
Alternatively, the Government could consider paying any future lost income to index-linked gilt holders upfront, it says.
Tiffany Tsang, senior policy lead: LGPS and DB, PLSA, said: “The decision to develop a more robust measure for inflation is the right one but the proposed methodology risks billions of pounds in pension assets.
"Pension schemes have made RPI-linked investments in good faith, and under the guidance of the regulators, to prudently fund pension benefits. They should not face short-falls as a result of the changes.”