Measuring defined benefit pension scheme liabilities using the retail price index has been called into question by the chair of the Work and Pensions committee.
Labour MP Frank Field has written to the Office for National Statistics (ONS) to ask the body to consider if using the retail price index (RPI) as method of indexation for defined benefit (DB) schemes is still adequate.
With all other things being equal, whether RPI or consumer price index (CPI) indexation is used could result in a 5-10 per cent difference in the scheme’s liabilities, Mr Field said, citing an estimate from The Pensions Regulator (TPR).
According to a Department of Work and Pensions (DWP) green paper published last February, in around 75 per cent of cases, the RPI is used as the official measure of inflation, and it is mentioned specifically in the scheme rules, Mr Field said.
Mr Field noted that in March 2016, John Pullinger, national statistician at ONS – to whom the letter is addressed to - said that RPI is not a good measure of inflation and does not realistically have the potential to become one.
The RPI has long tended to grow faster that the CPI, but since 2010, however, this gap as approximately doubled to around one percentage point. This has been attributed to the way in which clothing prices are incorporated in the indices.
In the letter, Mr Field asks Mr Pullinger to clarify whether the RPI is an accurate measure for the purposes of uprating pensions of changes in the cost of living.
He also questions if the RPI is an accurate measure of any economic fundamental, and if the ONS plans to address the apparent anomaly regarding clothing prices in the calculation of the index.
Finally, he asks if the ONS has conducted any analysis on the effects of the use of the ROI for uprating purposes on DB pension funds and, by extension, to the wider economy.
Tom Selby, senior analyst at AJ Bell, noted that “seemingly small differences in the inflation measure used for indexation can have an enormous impact on the size of a DB deficit”.
He said: “Such deficits could potentially strangle a company's ability to invest and pay out dividends, so it's understandable politicians are keen to examine this issue.”
However, Mr Selby believes that it will extremely difficult to change the index used in the cases “where scheme rules dictate a certain measure of inflation - in this case RPI - is used for indexation”.
Mr Field has also written to ministers, the pension regulator and the trustees of the Universities Superannuation Scheme (USS) in an effort to understand why that scheme's deficit has increased so much.
