The government has published its response to the consultation on replacing the Retail Prices Index (RPI) inflation measure with the alternative Consumer Prices Index (CPIH).

Although the response confirms the change will go ahead, the reform has been delayed until at least 2030, when the final set of index-linked gilts with an RPI promise will mature.

The Association of British Insurers estimates that the move could cost investors and pensioners £122bn, with pensioners hit particularly hard.

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 be 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.”

The Pensions Policy Institute found that nearly two thirds of private sector DB schemes currently uprate pension benefits in line with RPI. It also calculated that the shift in 2030 would cost the average man £6,000 and the average woman £8,000.

Meanwhile Aegon calculated that over 30 years, pensions could be 20% lower than under RPI increases.

Steven Cameron, pensions director at Aegon, 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. In recent years, the government and its statistical teams have been gradually moving away from calculating inflation using the Retail Prices Index (RPI) and have been publishing the Consumer Prices Index (CPI) and an alternative including Housing Costs referred to as CPIH which it believes is a more accurate way of assessing changes in the cost of living.

“For example, the triple lock increases to the state pension are the highest of earnings growth, 2.5% or price inflation as calculated using CPIH. Today’s announcement means from 2030, the RPI will be based on the approach currently employed within CPIH.”

Sarah Coles, personal finance analyst at Hargreaves Lansdown, said: “This is a horrible blow for pensioners, who will pay the lion’s share of the eye-watering cost of this move. The government will change the way RPI is calculated to make it more like CPIH – which is likely to make it lower. This will mean any pensioners with an RPI-linked income will see it rise slower in future.

“It will stop the government from going inflation shopping – linking things we pay the government to higher RPI, and government spending to lower CPI. However, there was an easier way to do this: the government could have simply done the right thing and used a single inflation measure, without the need to take the money out of the pockets of pensioners.”

What’s wrong with RPI?

The problem with RPI became clear around 2010 when the range of clothing in the basket of goods used to calculate RPI was expanded to make it more comparable through the seasons.

As a result, there was a spike in clothes price inflation that the ONS has called ‘implausible’. It comes down to how RPI averages things out, which tends to exaggerate rises.

RPI has been dropped as an official inflation measure, and just kept as a legacy measure because so many things are linked to it throughout the economy.

CPI was introduced as a European measure, and CPIH is a variation that factored in the cost of housing. It has since become the government’s measure of choice.

CPIH calculates its averages differently to RPI, so tends to be consistently lower, normally about 1%.

The consultation looked at aligning the two, so RPI more closely matches the methodology of CPIH.