Dairy Crest cuts indexation through CPI switch

UK dairy products manufacturer Dairy Crest has cut its pension deficit by £45m (€49.6m) by altering the indexation of its retirement benefits.

The £1.1bn Dairy Crest Group Pension Fund has switched its inflation measure from the retail prices index (RPI) to the consumer prices index (CPI). In the UK, the latter is typically lower, meaning inflation-linked benefit increases would also be lower in future.

In a statement to the stock market, the company said the move has reduced its annual contributions to the pension fund by £12m a year for the next two years.

In addition, the scheme’s actuarial deficit was calculated to be £100m as of March 2016, down from £145m three years earlier.

Dairy Crest said: “Following detailed negotiations with the [trustees], in future annual increases will be linked to CPI rather than RPI. CPI is already used by the fund for increases in deferred pensions and is becoming more widely used across the UK including for the calculation of increases in public sector pensions.

“This change was agreed as part of a broader package to put the fund on a stronger foundation for the future. This package includes continuing to move to lower-risk investments over time.”

The move from RPI to CPI is a significant one as it has been suggested by many in the UK as a partial solution to the country’s pension funding problem.

In February the government suggested giving schemes the ability to make the switch if they were struggling to reduce deficits. It also suggested allowing stressed schemes to suspend indexation completely.

The subject was raised last year in discussions about the future of the British Steel Pension Scheme (BSPS). The scheme’s trustee board argued that a change in indexation would make it more sustainable.

BSPS’ subsequent agreement with the regulator to spin off from its sponsor, Tata Steel UK, was confirmed today. A new scheme, sponsored by Tata, is to be set up with lower annual increases.

However, other schemes are likely to find it more difficult to make such a change to indexation, as their rules are stricter in describing how increases should be applied.