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​Inflation measure changes could shift pension funding by up to 10%

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A planned inflation measure change by the UK’s statistics authority could improve or knock funding positions of defined benefit (DB) pension schemes by as much as 10%, according to consultancy LCP.

In a new report, Phil Cuddeford, partner and head of corporate consulting at LCP, said the reform by the Office for National Statistics (ONS) would introduce big risks and opportunities.

“With a potential change to the funding position of +/-10%, the change will be huge good news for some and huge bad news for others,” he said.

“Regardless of the impact for each scheme, sponsors who engage now will be best-insulated from future shock,” he said.

LCP said it urged all sponsors to consider the issue of the Retail Prices Index (RPI) change carefully, but particularly if they were involved in any significant pensions action.

This could include buying or selling index-linked gilts or similar swaps, buy-ins and buy-outs, changing the index used for pension increases, transfer value or pension increase exchange (PIE) exercises, and “long-term journey planning”, it said.

On 4 September, the Chancellor of the Exchequer announced his intention to consult on whether to bring the methods in CPIH (Consumer Prices Index including owner occupiers’ housing costs) into RPI between 2025 and 2030, effectively aligning the measures, according to the ONS.

The chair of the UK statistics office David Norgrove had written to the previous chancellor on 4 March recommending the publication of the RPI be stopped at a point in future.

According to LCP, the CPIH measure is expected to be around 1% a year less than the current RPI. 

“This means that DB scheme members with RPI-linked increases will expect to get lower pensions from 2030 than they otherwise would have had,” the firm said.

“While a net financial gain is expected if the scheme increases are mainly RPI-linked and this is only partially hedged, schemes are likely to suffer a net financial loss if they are mainly CPI-linked and RPI instruments are in place to hedge this,” it said.

Actuarial valuations, company accounting, and long-term funding targets would all be affected by the change, it said, adding that buy-in and buy-out insurers and consolidators may eventually charge less to take on RPI-linked benefits.

“Year-end accounting assumptions for RPI and CPI must be set consistently to avoid unwanted volatility, and sponsors with upcoming year-ends need to address this now,” the firm said.

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