However, after extensive consultation, he will not make the change to replace the Retail Prices Index (RPI) with the Consumer Prices Index including Housing costs (CPIH) until 2030.
The Pensions and Lifetime Savings Association, the trade body that represents 1,300 pension schemes with 20m members, has previously expressed major concerns about the move, warning it could see pension schemes up to £80bn worse off.
The Association of British Insurers and other bodies including the Pensions Policy Institute have also attacked the proposals.
RPI, an older measure of inflation, tends to be higher than CPIH and therefore leads to bigger annual indexation increases for pension scheme members.
Chancellor Rishi Sunak announced today that the Treasury had decided to replace the RPI measure in 2030.
The deferral of the change to 2030 is to avoid index-linked gilt holders being hit excessively but holders of RPI-linked pensions who lose out in the long term will not be compensated.
Tom Selby, senior analyst at AJ Bell, said: “Chancellor Rishi Sunak has pushed the effective abolition of the RPI inflation measure as far back as he can to ensure it is not ‘materially detrimental’ to holders of index-linked gilts.
“However, from 2030 onwards the message is unequivocal: if you are negatively impacted by this, tough. The Government is clear it will not provide any kind of compensation to those who lose out as a result of the downgrade in the value of RPI.
“This looks set to include millions of defined benefit (DB) scheme members whose pensions are linked to RPI. In addition, those who have bought annuities from insurance companies promising annual RPI inflation rises will also bit hit. While the average difference between RPI and CPIH might look small at 0.8 percentage points, over time that could lead to a retirement income worth thousands of pounds less.”
David Gibb, Financial Planner at Quilter, said: “On first sight a simple change to the methodology for calculating inflation could appear inconsequential, but many financial services products are tied to increases in RPI so the impact on markets, pension schemes and people’s personal finances could be stark.
“There are winners and losers to changing RPI and some will breathe a sigh of relief that the Chancellor has blockaded any change till February 2030. In particular the owners of government-issued index-linked gilts, who are predominantly pension schemes, will be able to hold their current gilts to maturity without fear of revaluation.”
Steven Cameron, pensions director at Aegon, warned that over 30 years, pensions could now be 20% lower than under RPI increases. He said: "If you’re one of the millions who receive an inflation-protected pension from a defined benefit scheme or annuity, it could impact negatively on your pension income for the rest of your life."