UK - Calculating pension increases according to the consumer price index (CPI) would reduce liabilities for deferred members by around 7.9% for a typical UK scheme, according to PensionsFirst.
However, the switch from the retail price index (RPI) may have exactly the opposite effect than originally intended by the government, the organisation warned.
James Mushin, director of professional services at the firm, said that unless legislation was introduced that would allow for retroactive application of CPI use across the board, then deferred scheme members would feel the effect while waiting for pension payments, but likely not when they receive their benefits.
Mushin noted that the government's reasoning for introducing CPI was that it fairly reflected pensioners spending habits, as it took mortgage increases out of the equation.
"Actually we're seeing the opposite [effect], because CPI is replacing RPI for those in deferment, leading up into retirement and then you're still getting RPI in retirement. So it's a bit of a twist there," he commented.
He said that while RPI is mostly specified as the measure by which schemes needed to increase pension payments, scheme rules will often only refer to the statutory revaluation for any increases to deferred members accrual.
If government plans go ahead, then the statutory revaluation rate would be the consumer price index from next April.
In figures calculated for IPE, PensionsFirst estimated that a representative UK pension scheme, with 10,700 members and total liabilities of £2.065bn, would see liabilities for deferred scheme members drop by £35m, or 7.9% from £402m, once CPI was introduced.
He further expected total scheme liabilities to fall by almost 10% if the government introduced legislation allowing for the retroactive worsening of accrued benefits.
Based on his estimation, scheme liabilities would therefore fall to £1.865bn.
However, Mushin conceded that any such retroactive attempt by the government would be fraught with legal problems.