Alistair Russell-Smith, Partner, Hymans Robertson responds to Bank of England Governor, Mark Carney’s call for a “deliberate and carefully timed” withdrawal from the Retail Prices Index (RPI)

“The impact of a withdrawal from the RPI would have consequences that would reverberate across financial services and not least within the world of defined benefit/final salary pensions. The measure is currently used by many schemes to calculate annual indexation and has been subject to much industry debate.  If a withdrawal from the RPI meant schemes could reference CPI rather than RPI for indexation then this would have a very significant impact.

“In fact, if CPI was adopted by the entire FTSE 350 we expect the resulting liability reduction would be £100 billion. Our most recent estimate of DB pension deficits within this group stands at £85 billion, meaning that such a move would actually place the FTSE350 into surplus.  However, this would materially reduce member benefits, on average by around £20,000 over a member’s lifetime.

“The closure or collapse of DB pension schemes in the FTSE 350 and in the UK as a whole has, rightly, been the subject of much analysis and consideration in recent weeks. Our research shows that pension scheme deficits continue to be manageable for around 85% of the FTSE 350 as they could pay off their deficits by using less than 6 months’ of earnings.  It is therefore questionable if a wholesale move to CPI is necessary for most schemes.  However, this would end the current rules lottery, and be extremely valuable for the minority of employers where the pension scheme is very significant.”