People who have left risks unmanaged will be rewarded under the government’s proposals to reform the Retail Prices Index (RPI) while those in well-risk-managed schemes could lose out, says Barnett Waddingham.
The pensions consultant said its latest research showed RPI-linked liabilities may see a significant reduction in their liability values by up to 10% or more.
The government's decision to reform RPI and align it with the housing-cost based version of the Consumer Price Index, known as CPIH, continues to attract criticism.
Consultant Lane Clark & Peacock's (LCP) October warning to trustees and scheme sponsors recommended they avoid significant pension action until the proposed changes to the RPI methodology become clearer.
Barnett Waddingham is the second consultant to come up with a 10% figure after LCP also estimated the changes could alter liability positions by up to 10%.
Principal and senior investment consultant Ian Mills said the seismic implications of the changes, which will not prioritise well-funded and risk-managed schemes, will "dangerously affect trust and behaviour".
He added: "The government runs the risk of punishing those who have been prudent, with a well-funded and well risk-managed scheme, whereas those that have left risks unmanaged could be rewarded. The government needs to be careful about moral pitfalls like this. For scheme trustees, its now largely a game of wait and see over the course of the consultation."
All trustees should reanalyse their own inflation risks, Mills said, ensuring they review inflation-related triggers and "consider readjusting inflation hedge ratios".
Many schemes have been advised to hedge inflation risks in recent years, with the worst hit likely to be those using RPI-linked assets to hedge CPI-linked liabilities.
The research found the impact on schemes could also be more pronounced if RPI was amended from 2025 rather than from 2030.
Debate over the appropriateness of RPI as a measure of inflation resurfaced early this year, with a consultation due to take place in January 2020.
Mills concluded: "There are lots of complex and interlocking issues here, so it won't be easy for pension trustees to identify all the issues without help. While the financial institutions affected will lobby powerfully to argue their case for compensation, I hope that we the pensions industry can come together.
"This isn't just about making sure pension schemes are compensated - it's about making sure pensions are."
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