A survey by provider MetLife Assurance finds the importance placed by defined benefits pension scheme trustees and sponsors on inflation risk has gone up “dramatically” as uncertainty looms over the switch from retail price index (RPI) to consumer price index (CPI).
According to data released by the Office of National Statistics, CPI inflation figure touched 4.4 per cent in the month of July, on an annualised basis.
The UK Pension Risk Behaviour Index (PRBI) shows trustees and sponsors now rank inflation risk as the sixth most important risk out of 18 risk factors facing their schemes. Inflation risk gain maximum number of rank, it moved to number fifth in 2011 from number fourteenth in 2010. Inflation risk was chosen as a significant risk 37 per cent of the times by trustees, compared to 25 per cent in 2010.
However, trustees may be attaching “significant amount of attention” on inflation because of the government’s announcement to shift statutory indexation to CPI from RPI in July 2010, the survey revealed.
Pensions minister Steve Webb however later confirmed that legislation will be brought to prevent schemes that underpin RPI to switch to CPI and ruled out schemes being forced to switch to CPI after a consultation and further announcements on the matter.
“Whilst we welcome the government’s statements that a CPI underpin will not be required as it would have increased complexity and cost, it will not be until legislation is enacted that the uncertainty faced by trustees and sponsors over the past year will be removed,” said Emma Watkins, director of Business Development at MetLife.
“We encourage trustees and sponsors to meet regularly to review ways to manage the full spectrum of risk factors faced by their schemes and to understand which risks need to be prioritised in the short, medium and longer terms. Frequent meetings ensure that both groups can shift their focus in response to economic, regulatory and demographic changes,” she added.