Switch to CPI could save British Airways scheme £900m
UK - British Airways could slice around £900m off the deficit in one of its defined benefit (DB) pension schemes by switching increases to pensions in payment from the retail price index (RPI) to the consumer price index (CPI).
The New British Airways scheme, which has a £1.9bn deficit and is the larger of BA's DB pension schemes, requires annual increases to pension in payment to increase in line with the lower of either 5%, or by the pensions increase (review) order.
The latter has been rising in line with RPI, but from April 2011, it will rise in accordance with CPI, which has been lagging RPI by 0.87% a year, according to the UK Department for Work and Pensions.
The BA scheme is one of around 20-30% of UK DB schemes that are able to make the switch from RPI to CPI because RPI is not hardwired into the pension scheme's rules.
While the potential reduction in its liabilities will be good news for BA, pensions analysts have warned the scheme's £9bn overall liabilities still dwarf BA's £3.2bn market capitalisation.
The change will also be bad news for members. A BA pension scheme trustee last week complained to pensions minister Steve Webb that the change would reduce a member's pension by 20% over the course of a retirement span.
BT, which has a similar trust deed to the BA scheme, recently said it would slash £2.9bn off its scheme liabilities by making a similar switch, while the DWP said the industry as a whole might save a total of £77bn over the next 15 years.