CPI change gives boost to defined benefit pensions
Changes to the way inflation is measured and a stabilising in life expectancy is set to significantly improve the funding position of defined benefit pension schemes, a report indicated last week.
The Government's decision to allow companies to increase pension benefits in line with inflation as measured by the Consumer Prices Index (CPI), rather than the Retail Prices Index (RPI), is set to wipe off nearly £60bn of private-sector pension liabilities by the end of 2011, according to KPMG.
The group said just over half of the companies it questioned were now using CPI for certain benefit increases, with a typical rate of 2.9% being used, significantly lower than the average rate of 3.5% for schemes using RPI.
At the same time, increases in the assumptions pension schemes make about life expectancy have stabilised, suggesting companies think they have now made sufficient allowances for recent increases to the length of time for which people are expected to live.
The steep rise in life expectancy in recent years has put a major financial burden on schemes and has been one of the main drivers of the closure of defined benefit pensions.
But the group said the assumptions companies were making for life expectancy at the end of last year were unchanged from the previous two years, following significant jumps between 2004 and 2007.
The financial position of pension schemes has been further boosted by strong investment returns during the past year, with the average scheme seeing its portfolio grow by around 13%.
Mike Smedley, pensions partner at KPMG, said: "Following a tough period for private-sector scheme members and employers, the pendulum has now swung, and we expect public-sector employees to now start feeling the pain."
The latest figures from the Pension Protection Fund showed that the financial position of the UK's 6,560 defined benefit schemes had continued to improve, with the schemes collectively having a surplus of £48.4bn at the end of last month, up from one of £46.1 bn in January.