Pension funds disappointed by decision on inflation index

LONDON Thu Jan 10, 2013 1:17pm GMT

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LONDON (Reuters) - Workplace pension funds hoping for a respite in tackling soaring deficits were disappointed by a government decision on Thursday not to reduce the country's official inflation rate.

The Office of National Statistics opted against a widely anticipated change to the long-standing Retail Price Index (RPI), which is used to calculate workplace pension payouts to the retired .

Most economists had expected RPI to be changed significantly to bring it in line with the consumer price index which typically is significantly lower due to different statistical techniques.

The ONS decided that a new RPI-based index should be published from March 2013 using a new formulation known as RPIJ, but that the existing RPI series should continue to be used for index-linked gilts and bonds.

Rock bottom bond yields and repeated rounds of central bank easing have contributed to a sharp drop in the yield on British government gilts - a staple investment for pension funds, making it more expensive for funds to match income to liabilities unless they add riskier, higher-yielding assets to portfolios.

A reduction to the rate of inflation by as much as one percent would have reduced pension scheme liabilities for Britain's top 350 firms by 30 billion pounds from a total deficit of 85 billion pounds, said Martin Potter, a partner at pension consultants Hymans Robertson.

"While trustees would have welcomed an improvement in funding levels, it would have come at the expense of future payments to pensioners."

The decision was good news for Britain's pensioners, who could have seen an average RPI-linked final salary pension of 7,600 pounds fall by 20,000 pounds over a 20 year retirement, umbrella organisation the National Association of Pension Funds said in a statement.

Deficits of British final salary linked company pension pots more than doubled to 231 billion pounds last year, according to the Pension Protection Fund, fuelling concerns that firms may close these benefit scheme altogether.

"We expected a change in the RPI rate to cut deficits by about a quarter, but the light at the end of the tunnel has been removed for pension trustee scheme sponsors - to the benefit of members," Sarah Brown, head of inflation research at actuary Punter Southall told Reuters.

(Reporting by Sarah Mortimer; Editing by Sophie Walker)

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