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UK funds should be allowed to enforce CPI indexation to cut deficits

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Sponsors with large UK pension deficits should be allowed to override any indexation provision and only offer increases in line with the consumer prices index (CPI), LCP has urged.

Proposing the government end the “legal lottery”, the consultancy estimated FTSE 100 firms would see a £30bn (€35bn) reduction in their liabilities if they were able to switch to CPI, rather than the retail prices index (RPI) for all future indexation.

The recommendation came as LCP estimated the largest listed firms had pension deficits of £63bn by early August, following the Bank of England’s re-launch of quantitative easing, a significant increase from the £46bn estimated shortfall in June when assets stood at £582bn.

However, while advocating the change, LCP partner Bob Scott said the switch to the traditionally lower level of indexation should only occur subject to certain safeguards.

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“The safeguards are important as they should not automatically allow a profitable company with a large pension surplus to increase that surplus by reducing benefits,” he said.

“They could, however, provide relief to a company with a large deficit where the trustees agreed it was in the members’ interests for benefits to be reduced.”

LCP’s call came the same day as latest CPI data was released, which showed inflation running at 0.6% in July, up by 0.5 percentage points compared to June. This compared to a 0.3 percentage point increase in RPI to 1.9%.

Charles Cowling, director of JLT Employee Benefits, said the inflation data amounted to a “Brexit double-whammy”, as it added to the pressure facing funds due to increasing deficits due to uncertainty following the vote in June.

The suggestion funds be allowed to amend the level of indexation comes months after such a move was proposed to reduce the deficit within the British Steel Pension Scheme (BSPS), which faces entry into the Pension Protection Fund as its sponsor, Tata Steel, seeks to sell its UK assets.

At the time the consultation was announced, the Pensions and Lifetime Savings Association (PLSA) warned against “bespoke” regulatory changes, and said it would be “inconceivable” for the government to not offer such a solution to the entire DB sector.

The previous government considered a statutory override of trust deeds in 2010, but then-pensions minister Steve Webb ruled out such as step as it could see member trust in schemes “severely damaged”.

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