Soft drinks manufacturer Britvic has seen a reduction in its pension liabilities following a change to the inflation index used by the Britvic Pension Plan.
In its latest annual report, the company stated that it has provided for certain future pension increases regarding the consumer price index rather than the retail price index, as had previously been the case.
In June, Britvic was successful in its appeal of a January 2020 ruling, giving the company precedent to instruct the setting of future pension increases, Pensions Expert previously reported.
The change to CPI from RPI at the end of the previous year “has resulted in a reduction in pension liabilities, and is the main driver behind the remeasurement gain of £50.5m,” the report stated.
If the decision to use CPI is based on the current market conditions alone, it may well prove short-sighted and result in more unpredictable returns in subsequent years once the economy rebalances from the shock of Covid-19
Penny Cogher, Irwin Mitchell
As a result of the change, no deficit funding contributions “are payable to the plan up to the next re-evaluation effective March 2022” outside of a £5m annual partnership payment, which will continue until 2025.
Britvic was only allowed to make the change based on an interpretation of its scheme rules by the Court of Appeal, meaning it is not necessarily an option for every pension scheme.
According to the group’s 2020 annual report, it had been expected to pay an additional £15m into the scheme by December 31 2019, on top of the expected partnership income of at least £5m a year. However, due to the court cases being heard during the following period, the trustee of the plan agreed that contribution payments would be paid into a blocked account.
This sum has now been returned to Britvic.
Inflation situation
CPI takes no account of property costs, whereas RPI is heavily influenced by them.
Penny Cogher, partner at Irwin Mitchell, says that CPI may therefore be favoured “in times where the growth of housing costs is sluggish compared with rises in other costs, as is the case right now”.
RPI typically runs at about 1 percentage point higher than CPI, although a changing economic landscape in the wake of the pandemic has seen the two rates rise and drift apart.
October’s CPI rate was 4.2 per cent, up 1 percentage point on September’s figure, while the RPI rate stood at 6 per cent, up from 4.9 per cent in the previous month.
Compounded over the years, the choice of the less generous index can result in pensioners losing thousands of pounds, despite CPI being considered a more accurate index.
Cogher said: “The rises in inflation over the past year have affected many areas of policy, both in government and in companies. The decision of whether to use RPI or CPI is for the trustees of pension schemes and employers to consider based on their own scheme rules and any specific business needs that can properly be taken into account.
Inflation jump poses ‘a real challenge’ for pension schemes
The surge in inflation in August – the highest since records began in 1997 – could prove “a real challenge” for pension schemes, experts have warned, especially if it proves not to be a transitory phenomenon.
“However, if the decision to use CPI is based on the current market conditions alone, it may well prove short-sighted and result in more unpredictable returns in subsequent years once the economy rebalances from the shock of Covid-19.
“The CPI including owner occupiers’ housing costs remains more stable and on the same monthly basis — it rose by 0.6% in November 2021. This is the preferred index of many pension scheme trustees and employers as it does include an allowance for housing costs,” she added.
In September, industry experts warned that a jump in inflation rates could prove to be damaging for schemes, although the extent of individual schemes’ inflation hedging will prove vital.
