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Linking UK pensions to CPI could create investment 'mismatch'

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  • Linking UK pensions to CPI could create investment 'mismatch'

UK - Linking private sector pensions to the consumer price index (CPI), rather than the retail price index (RPI), could cause a "mismatch" of investments versus liabilities, Nigel Peaple of the National Association of Pension Funds (NAPF) has cautioned.

However, the industry association's head of policy also said it was not "absolutely critical" for CPI-linked instruments to be available immediately, adding that investors could work with existing assets.

Peaple said there was "an issue" for DB schemes looking at their investment strategies and how to match off their liabilities, and that the current absence of CPI-linked instruments had created "a bit of a mismatch".

"Obviously, CPI and RPI are out of sync, and index-linked instruments are linked to RPI," he said.

"But there is already a mismatch because with pension scheme liabilities, the indexation is capped."

The shift in policy, announced by the government last week, "potentially introduces a further mismatch" and has already been criticised for impacting areas ranging from pension administration to investment strategy.

"My impression is that it's not absolutely critical, as they've got these instruments already available," Peaple said.

"You can already work with existing instruments, work with existing assets, but I'm sure the de-risking specialists will be able to come up solutions."

He added that while there may be value to introducing CPI-linked instruments in the future, pension funds will be able to work around their absence if necessary.

He went on to say the government did not need to worry about the lack of notice on the policy shift.

"It's kind of chicken and egg thing," he said. "Do you get all your ducks in a row before you do anything? Or do you state you are going to do something and then work out how to do it?"

His comments contrast with those of Robert Gardner, chief executive at Redington, who has criticised the government for not consulting with the industry.

Gardner said: "It's fair to say there has been a huge amount of unintended consequence of this announcement, and there should have been far more consultation from the government around switching from RPI to CPI."

A recent survey by KPMG estimated 80% of pension schemes would be affected by the changes, with Mike Smedley, a pensions partner at the company, calling the move a "smallprint lottery".

Smedley said: "If RPI is specifically cited in the scheme rules, our understanding is that this will remain the case - even if RPI was only introduced to meet the government's requirements at the time."

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