Trustees and scheme sponsors should avoid significant pension actions until proposed changes to RPI inflation methodology become clearer, Lane Clark & Peacock says.
The consultant's second annual corporate sponsor report said the government's decision to reform the Retail Prices Index (RPI) and align it with the housing-cost based version of the Consumer Price Index, CPIH, could have sizeable consequences for both schemes and sponsors.
It said the changes could have a material impact on pension scheme actions - such as buying or selling of index-linked gilts, buy-ins and buyouts, and long-term journey planning - and urged sponsors to reduce such actions until the path forward is clearer.
LCP said CPIH is expected to be around one percentage point less than current RPI - meaning defined benefit scheme members with RPI-linked increases will expect lower pensions from 2030 than they would have otherwise had.
LCP estimated the change could alter liability positions by plus or minus 10%.
But it said, while a net financial gain is expected if a scheme's increases are mostly RPI-linked and only partially hedged, schemes are likely to suffer a net financial loss if they use mainly CPI-linked and RPI instruments to hedge.
Insight Investment head of solution design Jos Vermeulen said: "Plans with CPI-linked liabilities who have taken prudent steps to hedge these liabilities using index-linked gilts may also see sudden holes appear in their pension schemes.
"By our estimates, the government stands to make savings of up to £100bn from its proposed fix of this flawed statistic, but at the expense of holders of index-linked gilts. These holders are predominantly UK pension schemes."
Vermeulen added that older people will therefore feel the effects particularly strongly.
He said: "Pensioners with RPI-linked benefits - the majority - will see significant dents in the value of these benefits if the proposed changes go ahead. This will diminish many pensions' future incomes and also be felt immediately by those exercising their rights to take transfers out."
LCP also warned sponsors and trustees to act early - as technical consultations on the move, due to be issued early next year, are likely to consider whether the date may bring proposed changes forward from 2030 to 2025.
Head of corporate consulting Phil Cuddeford explained: "These recent announcements on RPI reform introduce big risks and opportunities and sponsors who engage now will be best placed to deal with these."
He added: "Sponsors need to take advantage of the latest thinking to ensure they comply in a way that protects member benefits and shareholder value. The switch may be some way off, but given we know it is coming, it would be foolish not to factor this into any decisions being taken now."
Schemes also need to accurately establish how much CPI exposure they have.
Redington managing director in investment consulting Karen Heaven said this may not be "a material amount" for some schemes.
She added: "Where the CPI-linkage is meaningful, schemes could discuss with their liability-driven investment manager the possibility of replacing RPI-linked assets with CPI-linked assets in order to reduce risk. There is a great deal of uncertainty around the timing and repercussions of any changes, however.
Schemes should also use the period of time before January to engage with policyholders to communicate their needs, Vermeulen concluded. RPI changes "don't need to create winners and losers", he added, providing "adequate compensation is put in place for those adversely affected".
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