Pension Minister Steve Webb recently announced that private pension schemes could align their indexation provisions with CPI (Consumer Prices Index) rather than RPI (Retail Prices Index).
In one fell swoop, the deficits in private salary pension schemes were reduced by this announcement, because the amounts that now need to be found to meet the schemes’ liabilities have been cut. A move to CPI will only be possible in schemes where the rules explicitly allow it – some pension schemes had it written into their DNA that the amount they would provide would rise with RPI and are therefore impossible to change.
As you might expect, employees’ groups and unions were furious with the announcement, but employers’ organisations welcomed the announcement as a positive step forward. Employers collectively heaved a sigh of relief that their pension liabilities would now be more affordable.
After today’s announcement from The Pensions Regulator, a different sigh might be heard at the Confederation of British Industry. David Norgrove, the Regulator’s Chairman, has claimed that any savings that would have been made from the switch should be applied to reduce the pension schemes’ deficits. In real terms then, employers will be no better off but employees’ defined benefit schemes should be safer.
It seems that an enormous pension deficit is announced to the press every day, and we have become so used to the large sums involved that a pension deficit of a couple of billion pounds no longer has the impact on the news that it used to. The issue is compounded by the fact that actuaries argue about how bad the same scheme’s deficit is – pensions are such long term liabilities that there is as much art as there is science in coming up with realistic figures.
But whatever the exact numbers may be, UK final salary schemes are in trouble. 160 schemes have been taken over by the Pension Protection Fund. Poor stock market returns and increasing longevity compound the problem. Whatever The Pension Regulator or the Pensions Minister comes up with next, this is an issue that will run and run.
