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Tesco pension fund's CPI switch paves way for other companies, experts say

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  • Tesco pension fund's CPI switch paves way for other companies, experts say

UK - Tesco pension fund's decision to switch from the retail prices index (RPI) to the consumer prices index (CPI) for inflation linking will have little impact on members, but it will set an example for other companies, experts say.

Earlier this week, Tesco started a consultation on increasing the pension age from 65 to 67 and moving the inflation index from RPI to CPI for its defined benefit (DB) pension scheme.

Joanne Segars, chief executive at the National Association of Pension Funds (NAPF), told IPE: "Even with these changes, the Tesco staff pension would remain very generous. And Tesco would be one of only a handful of big companies that offer new staff a guaranteed pension linked to pay.

"Staff should also be reassured that the pension rights they have already built up are protected."

David Bennett, managing director of investment consulting at Redington, said Tesco's move would have a "dual effect" on its staff pension scheme.

"The RPI/CPI switch reduces the value of liabilities while increasing the full retirement age, which means both a longer timeframe to fund the scheme as well as reduced future pension payments," he said.

According to Bennett, it is important to see this in the wider context of increased stress on sponsor companies resulting from growing pension deficits. 

"The increasing focus from rating agencies and equity analysts on pension deficits and risk can potentially have a knock-on effect on the cost and ability of sponsors to borrow or refinance via capital markets," he added.
 
"The benefits for Tesco have to be weighed against the costs for its staff. Unfortunately, in the current climate of rising life expectancy and lower investment returns, working longer and receiving less on an individual level may be necessary for the benefit of the whole."

Bennett said the fact contributions were not set to rise was still good news for members. He also stressed that, among the largest UK companies, Tesco's DB scheme was one of a handful that remained open to new members and future accruals.

Ros Altmann, director general at Saga, pointed out that, after the government changed its own pension up-rating from RPI to CPI, it is likely that all private sector schemes would look to do the same. 

"It is inevitable the Tesco move will more likely be the first of many more to come, as companies struggle to find ways to control their pension costs as life expectancy also rises, which of course is great news," she said.

"And as the state pension age and public sector pension ages increase, all private sector pensions are likely to increase their standard pension age in line with government's own practice."

Several bodies in the UK have voiced concerns about the use of CPI for indexation purposes.

In March last year, the Royal Statistical Society stressed, in an open letter to the chair of the UK Statistics Authority, that CPI was not a sufficiently accurate measure for inflation when applied to pensions.

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