Planned RPI changes could alter pension funding by 10%

Plans to change the way inflation is calculated could alter pension scheme funding positions by up to 10 per cent either way, according to LCP.

In its Accounting for Pensions Report, LCP stated that plans to change the method from RPI to CPIH, which the Office for National Statistics has suggested to occur by 2030, will affect decisions being made now by pension sponsors and trustees.

It estimated that CPIH would be around 1 per cent per year less than the current RPI.

This is likely to lead to defined benefit scheme members with RPI-linked pension increases receiving lower benefit levels from 2030 at the latest.

LCP noted that although a net financial gain is expected if the scheme increases are mainly RPI-linked and partially hedged, schemes are likely to suffer a loss if they are mainly CPI-linked and RPI measures are in place to hedge this.

It urged all sponsors to consider the switch carefully, particularly if they are involved in any significant pensions action – for example, buying or selling of index-linked gilts or similar swaps, buy-ins and buyouts, changing the index used for pension increases, transfer value or pension increase exchange exercises, and long-term journey planning.

Commenting on the report, LCP partner and head of corporate consulting, Phil Cuddeford, said: “Regulations are changing quickly, and corporate sponsors need to take advantage of the latest thinking to ensure they comply in a way that protects member benefits and shareholder value.

“Markets are also changing rapidly and the RPI reforms will introduce big risks and opportunities. With a potential change to the funding position of +/-10 per cent, the change will be huge good news for some and huge bad news for others.

“Regardless of the impact for each scheme, sponsors who engage now will be best-insulated from future shock.

“As year-end approaches, it is important that sponsors keep in mind the upcoming inflationary changes. The switch may be some way off, but, given that we know it is coming, it would be foolish not to factor this into any decisions being taken now.”

The firm noted that actuarial valuations, company accounting, and long-term funding targets will be affected, while buy-in and buyout insurers and consolidators may charge less to take on RPI-linked benefits.

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