Uncertainty over the switch from the Retail Prices Index (RPI) to the Consumer Prices Index (CPI) for indexation of benefits and persistently higher than expected inflation in the wider economy has dramatically increased the importance defined benefit (DB) pension scheme trustees and sponsors place on inflation risk, research from MetLife Assurance reveals.
According to the 2011 UK Pension Risk Behaviour Index (PRBI), trustees and sponsors now rank inflation risk as the sixth most important risk out of 18 risk factors facing their schemes. The most significant shift was seen among trustees, with Inflation Risk moving up in the importance rankings from 14th most important risk in 2010 to 5th in 2011. However, the number of times Inflation Risk was selected as important when it was presented to respondents is virtually identical among both sponsors (38 percent) and trustees (37 percent). Overall, it was selected as important 37 percent of the time in 2011 compared with 25 percent in 2010.
Compounding this, latest CPI inflation figures reveal a rise from 4.2 percent in June to 4.4 percent in July. The results of the 2011 UK PRBI reveal that trustees may be placing greater importance on Inflation Risk because of the significant amount of attention given to inflation since the Government’s announcement of the proposed move to change statutory indexation to CPI from RPI in July 2010. However, the greater importance ascribed to Inflation Risk has not yet been matched with success in managing it. Trustees’ success ranking for this risk held its 12th place year on year. This is only slightly ahead of scheme sponsors’ success ranking which dropped slightly from 13th in 2010 to 14th in 2011.
Following further announcements and a consultation on the proposals, a statement from Pensions Minister Steve Webb confirmed there will be legislation to prevent CPI having to be used as an underpin for schemes which use RPI and ruled out legislation forcing schemes to change to CPI from RPI. Emma Watkins, Director of Business Development, MetLife Assurance Limited said: “Trustees and sponsors are rightly concerned about the risk of inflation. Whilst we welcome the Government’s statements that a CPI underpin will not be required as it would have increased complexity and cost, it will not be until legislation is enacted that the uncertainty faced by trustees and sponsors over the past year will be removed.
We encourage trustees and sponsors to meet regularly to review ways to manage the full spectrum of risk factors faced by their schemes and to understand which risks need to be prioritised in the short, medium and longer terms. Frequent meetings ensure that both groups can shift their focus in response to economic, regulatory and demographic changes.” The 2011 UK PRBI, released in May 2011, shows that schemes are increasingly more focused on funding-related risks, with the top three risks ranked as Funding Deficits, Employer Covenant and Asset and Liability Mismatch.
