On the go: Large pension schemes are not expecting a great impact from proposed changes to the retail price index, with limited allowances included in their sponsors’ 2019 accounts, according to Willis Towers Watson.
The consultancy firm analysed the assumptions made by 61 clients, who are either in the FTSE 100 or have pension liabilities of more than £1bn and with financial years ending December 31 2019.
The research showed that assumed RPI inflation fell by around 0.25 per cent across all scheme liabilities, in line with market movements last year.
However, assumed consumer price index inflation, which is typically set relative to RPI inflation, remained broadly constant. The average gap between assumed RPI and CPI inflation over the term of the pension liabilities reduced to 0.8 per cent from 1 per cent a year earlier.
Assumptions for the gap varied from 0.6 to 1.1 per cent. Lower assumed RPI inflation reduces the value of RPI-linked pensions in company accounts, Willis Towers Watson explained.
Chancellor Sajid Javid announced the intention to merge both inflation measures in September 2019, with a consultation due in January 2020.
However, in January Mr Javid announced that the consultation will be launched alongside the UK Budget in March, with a response expected before the parliamentary summer recess.
The RPI generally runs at about 1 percentage point higher than the CPI and is currently at 2.2 per cent, compared with 1.5 per cent for CPI inflation. Compounded over the years, the choice of the less generous index can result in pensioners losing thousands of pounds, despite the CPI being considered a more accurate index.
Bina Mistry, head of corporate consulting in Willis Towers Watson’s GB retirement business, said: “Neither financial markets nor UK plc appear to be reflecting full convergence of RPI and CPIH [CPI including housing costs] beyond 2030, in spite of the UK Statistics Authority’s announcement.
“Most organisations are effectively factoring in around half of the potential change from 2030, and none before that date. The effect on their overall RPI-CPI gap assumption is smaller still because a large proportion of pensions will be paid before 2030. However, different companies have taken different approaches, partly driven by auditor views.
“We might see a further reduction in RPI-linked liabilities next year if it becomes clearer that the change will go ahead without pension scheme members being compensated – though there could be legal uncertainty for some time to come,” Ms Mistry continued.
“But even where liabilities come down, what happens to deficits and surpluses will also be affected by how well hedged schemes are and by what the changes do to the value of RPI-linked assets.”
