The Office for National Statistics (ONS) new price indices “add to the uncertainty over how some defined benefit (DB) pensions will be increased in future” Towers Watson said following today’s publication of CPIH and RPIJ.

The consultancy firm added that the decision that Retail Price Index (RPI) numbers will no longer be designated as national statistics will also add to the uncertainty.

Towers Watson head of UK pensions John Ball said: “Companies began the year expecting that RPI would be changed in a way that would reduce future payouts from final salary pension schemes. They had a rude awakening in January when the national statistician announced that this would not happen after all. FTSE100 companies’ pension deficits increased by about £20bn that day.

“It will often be clear that scheme rules require pensions to continue to be increased with RPI, but trustees should get legal advice where it is not obvious how their rules interact with the recent proliferation of price indices. In some cases, the waters could potentially be muddied further now that RPI is no longer a national statistic. Unlike with RPI, however, pension increases in line with RPIJ may not be enough to satisfy the legislation at times when CPI inflation is higher.”

In a statement, Towers Watson outlined its concerns stating that the UK Statistics Authority’s decision to publish a parallel index, the RPIJ, rather than change the formulae used in RPI means that many employers sponsoring these schemes will no longer benefit from the smaller pension increases they had anticipated being able to pay.

It added that the future inclusion of owner occupiers’ housing costs in the CPIH index “may not be the only way in which CPIH differs from CPI”. It highlighted analysis published by the ONS last week, which said: “CPIH is not constrained by EU legislation and so its methodology will be developed to meet UK users’ needs, which could see further differences beyond housing costs, from the CPI.”

Ball added: “If the government thinks that CPIH will remain below CPI, it might be tempted to adopt CPIH in order to save money on public sector pensions and elsewhere. However, it’s by no means certain that CPIH will remain lower. If rents rise faster than other prices in future, CPIH inflation would be higher than CPI.

“Switching from CPI to CPIH for pension purposes would affect most private sector DB schemes to some extent. Although many still use RPI to increase pensions in payment, most use CPI to increase pensions between the time someone stops building up new benefits and when they retire.”

Share Story: