The National Milk Records pension fund has cut £6.2m from its deficit following a switch from the retail price index to the consumer price index as a means of calculating inflation-related adjustments to the fund.
Many schemes switch to CPI as it generally means pensions will increase about 1 per cent less a year, but also because it is widely considered a more accurate reflection of inflation.
Late last year, for example, the Methodist Church Council was consulting with its scheme members on a proposal to save £25m by switching to CPI indexation.
Trustees may say, ‘If you could afford to pay RPI, why would we allow you to run the benefits in CPI?'
Anne-Marie Winton, Arc Pensions Law
The NMR fund announced the switch in February this year to take effect on March 31. In its annual results, released last week, it said the change had led to a £6.2m improvement to the scheme deficit.
In the recent results, the company said: “This decision has a positive effect on our balance sheet, and has contributed to reducing the overall pension deficit by £6.2m to £3.5m (2015: £9.7m).”
A spokesperson for National Milk Records said of the change: “It is in the interest of pensioners and company shareholders to be realistic about the deficit recovery plan. For NMR it has a big impact on a relatively small business.”
The government changed the statutory minimum rate for pension increases to CPI from RPI in 2011. John Broome Saunders, actuarial director at consultancy Broadstone, said this led to schemes switching their rate, but many were unable to do so.
“There are schemes where scheme rules appear to constrain the trustees to using RPI, so they didn’t benefit,” he said.
“What’s been happening subsequently is trustees and employers have been looking at what specifically it says in the rules about measuring inflation. It may be that there’s an element of discretion in what measure trustees use.”
Employers are understandably keen to find any element of discretion, Broome Saunders said, due to the impact a switch can have on liabilities.
“You can understand the employers are usually very keen on the switch to take place because of the significant liabilities that can be saved,” he said. “You could easily be talking about 5 per cent to 10 per cent of liabilities. That could be half your deficit.”
The challenges of switching
However, Anne-Marie Winton, partner at law firm Arc Pensions Law, said making the change could be difficult, depending on how the scheme rules were drafted. “I’ve seen it fought against quite aggressively,” she said.
A switch could be seen as a trade-off between level of benefit and the security of that benefit, she said.
“Trustees may say, ‘If you could afford to pay RPI, why would we allow you to run the benefits in CPI?'”
There are probably schemes still negotiating a change in benefits, she said, but the recent referendum vote could have pushed such negotiations down the agenda.
