Editorial: Welcome to the September issue of Pensions Expert, one which comes amid untold levels of turmoil in the world around us.
Politics, the economy, cricket – the only certainty is uncertainty, creating interesting dilemmas for trustees and the wider pensions industry. In policy terms, the inevitable election before the end of the year should spell a period of relative stasis. Despite the Conservatives opening the spending taps, including on public sector pensions, and Labour’s longstanding promise to reshape capitalism in favour of the many, this will likely be a single-issue election.
Whatever the flavour of government we are left with by the end of this year, they will want to think very carefully before inflicting such a damaging cut to pensioner income in the infancy of their tenure
A pensions bill has been submitted for the Queen's Speech, but Guy Opperman or anyone else may have to wait for their chance to reshape retirement, by which time the landscape itself may have shifted – the need for defined benefit superfunds, for example, may have been outstripped by the pace of bulk annuity transactions and, at the other end of the funding spectrum, insolvencies.
One innocuous piece of policy does appear to have escaped the Brexit black hole, however, and it could have a profound impact on pensioners across the UK. As detailed in Stephanie Hawthorne’s analysis of Britvic’s recent inflation court case (page 30), the government has finally indicated just what it wants to do about the retail price index.
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RPI, as we are told over and over, is a flawed measurement of inflation, kept alive only by its omnipresence in financial markets (and the government’s habit of choosing whichever index of inflation most benefits its own coffers).
From that perspective it might seem reasonable to scrap it - after all, DB pensioners and annuity holders were promised inflation protection, not protection from price rises plus a juicy bonus of around one percentage point each year.
But that is to forget the human aspect of chancellor Sajid Javid’s preferred reconciliation method, which would see RPI continue to exit but adopt the methods (and therefore value) of the consumer price index variant CPIH.
“I’m not sure who the winners will be, other than the government,” says Jos Vermeulen, head of solution design at Insight Investment, urging both pensioners and asset owners invested in RPI-linked assets such as infrastructure, swaps and derivatives to respond to the consultation and demand compensation for this cut to their income.
Mr Vermeulen advocates for RPI’s new methodology to include a fixed margin above CPIH, thus negating the fall in value – in a similar way to how contracts referencing the defunct overnight London interbank offered rate will be calculated by reference to successor the sterling overnight index average, plus a given amount.
If this is not done, there could be some funding benefit for the minority of unhedged DB schemes, provided their liabilities are mostly uprated in line with RPI.
By contrast, those schemes with CPI liabilities using RPI hedging assets will see a dent to their funding level, just as the sector finally looks to be back on the right track. Schemes with a precise hedge in place will be unaffected.
This might once have given politicians the headache of choosing between businesses and pensioners. But as Mr Vermeulen notes: “Now that most people have hedged their liabilities, those corporates that would have benefited in the past, it’s not as clear.”
Whatever the flavour of government we are left with by the end of this year, they will want to think very carefully before inflicting such a damaging cut to pensioner income in the infancy of their tenure.
