Companies making pension allowances for RPI changes

Most companies with large pension schemes have made an allowance for proposed changes to the Retail Prices Index (RPI) in their 2019 accounts, according to Willis Towers Watson (WTW).

It found that assumed RPI inflation declined by around 0.25 per cent across all scheme liabilities, which was in line with market movements over the year.

However, assumed Consumer Price Index (CPI) inflation, which is usually set relative to RPI inflation, remained broadly stable.

The average difference between assumed CPI and RPI inflation in relation to pension liabilities fell to 0.8 per cent, from 1 per cent the previous year.

Assumptions for the gap between CPI and RPI varied from 0.6 per cent to 1.1 per cent.

In September 2019, the UK Statistics Authority announced plans to align RPI and CPIH no later than 2030, with the Chancellor Sajid Javid, saying that a consultation on whether to allow the change to occur earlier will be included in the 11 March Budget.

Commenting on the findings, WTW GB Retirement Business head of corporate consulting, Bina Mistry, said: “Neither financial markets nor UK plc appear to be reflecting full convergence of RPI and CPIH beyond 2030, in spite of the UK Statistics Authority’s announcement.

“Most organisations are effectively factoring in around half of the potential change from 2030, and none before that date.

“The effect on their overall RPI-CPI gap assumption is smaller still because a large proportion of pensions will be paid before 2030. However, different companies have taken different approaches, partly driven by auditor views.”

WTW analysed assumptions made by 61 clients who are either in the FTSE100 or have pension liabilities above £1bn, and who had financial years ending 31 December 2019.

Mistry continued: “We might see a further reduction in RPI-linked liabilities next year if it becomes clearer that the change will go ahead without pension scheme members being compensated – though there could be legal uncertainty for some time to come.

“But even where liabilities come down, what happens to deficits and surpluses will also be affected by how well hedged schemes are and by what the changes do to the value of RPI-linked assets.

“Willis Towers Watson also found that a large majority of these organisations (86 per cent) had not revised the previous year’s estimate of how GMP equalisation would affect their liabilities.

“Sixty-nine per cent estimated that commitments resulting from equalisation amounted to less than 1 per cent of their pension liabilities, including 44 per cent where the anticipated cost was less than 0.5 per cent.”

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