Deflation is bad news for pension schemes, according to JLT Employee Benefits chief actuary Hugh Nolan.

“Very few, if any, schemes will be able, or willing, to cut back pensions that are already being paid so these pensions will increase in real terms if deflation persists. That will increase the overall liabilities for the vast majority of schemes, even if they have a strategy of matching investments,” he explained.

Nolan said there is no need for schemes to panic yet as the fall in CPI was only small and could be a “blip”. He said most schemes base their annual increase in pension payments on the September inflation figures, so there are still several months for inflation to return before the schemes would be affected.

“Equally many schemes still use the higher Retail Prices Index to calculate their increases, so again these schemes would not be affected. Even schemes that use CPI for revaluing deferred pensions can take comfort from the fact that it's acceptable to offset any years of deflation against years of positive inflation when revaluing over the whole period of deferment, so very few deferred members will get a boost in real terms that the scheme would have to pay for," he added.

However, for the pensioners themselves, Nolan said deflation is good news because although the headline rate of deflation is small at 0.1 per cent, food prices have fallen by around 3 per cent.

The Office for National Statistics announced on Tuesday that the Consumer Price Index has fallen to 0.1 per cent, putting the UK in deflation for the first time in 55 years.

The main contributing factor for deflation came from air and sea fares, prices for both rose on the month but by far less than a year ago. However, this has been attributed to an early Easter, meaning price increases in airfares were not captured in inflation.

In addition, the ONS said motor fuels continued to be a downward push on the CPI rate of inflation but food, which has been a contributing factor in recent months has recently increased.

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