UK - The head of investment strategy at Mn Services has warned the impact of the switch from the retail price index (RPI) to the consumer price index (CPI) has been underestimated.

Gwion Moore said commentators have underestimated the future variance between the indices, as well as the resultant size of pension benefit reductions.

Moore also said the complexity of managing the risk through hedges had been exaggerated.

"It is relatively easy to create moderately effective hedges of the difference between CPI and RPI using existing market tools, and as a result, we should expect to see 'off-the-shelf' CPI swaps offered by banks and brokers," he said.

"However," he said, "in the absence of primary marketing, CPI securities are likely to have substantial bid-offer spreads."

Moore said pension schemes would be left to chose between CPI swaps and less exact CPI hedges, approximating the risk.

Raymond Haines of State Street Global Advisors had previously warned that one of the issues facing investors from a liability-driven investment perspective was the lack of directly available CPI hedges. 

In other news, record company EMI Group has failed to reach an agreement with its pension fund trustees over payments for a £217m (€273m) deficit, with the matter now being referred to the Pensions Regulator (TPR).

According to the company's recently published annual review, the EMI Group Pension Fund has a deficit of at least £115m, or as much as £217m, based on a valuation conducted at the end of March 2008.

The report says: "Agreement has not been able to be reached regarding a long-term funding policy for the fund, and absent such agreement, the Pensions Regulator has referred the matter to the Determinations Panel for resolution."

It says further that, in absence of any agreement with trustees, the Determinations Panel will identify the exact size of the existing deficit and set a repayment plan.

The report adds that the situation casts "significant doubt" on the ability of the group to continue functioning.

"The group may therefore be unable to continue realising its assets and discharging its liabilities in the normal course of business," it said.