• PPF shows effect of RPI/CPIH gilts change
• New Government working group to look at DC Small Pots problem
• DWP asks how AE alternative quality tests for DB and hybrid schemes are working

PPF shows effect of RPI/CPIH gilts change

The Pension Protection Fund (PPF) has published its response to the Treasury and UK Statistics Authority’s recent joint consultation on the reform to the Retail Prices Index methodology (see Pensions Bulletin 2020/11).  As a reminder, that consultation was asking about how and when (between 2025 and 2030) the RPI methodology should be aligned with the Consumer Prices Index including owner occupiers’ housing costs (CPIH).  This would affect everything that uses the RPI, including notably index-linked gilts and some pension scheme increase rules.

The PPF uses the RPI-linked gilt and derivative markets to hedge its liabilities against inflation risk (the PPF’s inflation linked liabilities are actually CPI-linked but it notes the absence of a liquid CPI bond market).

The interest in a response to a consultation that closed a month ago is that it shows the scale of the issue for a scheme which hedges CPI-linked liabilities with RPI-linked assets.  The PPF is expecting its assets of £32bn at 31 March 2019 to drop by around £1bn-£1.3bn as a result of the change in the construction of the RPI.  The lower end of that range is anticipated if the change takes place in 2030, the higher figure if the change takes place in 2025.  That’s equivalent to a fall in asset values of between 3% and 4% with no equivalent change in liabilities, although some of that drop has already happened as the market has partly adjusted in anticipation of the changes.  It is equivalent to around 2 years of collective levy payments from all levy payers.

Given these impacts, the PPF calls on the Government to implement the change as late as possible, ie in 2030, to mitigate the effect on both members and their schemes.  It also notes the potential for future legal challenges to the change to create extended periods of legal uncertainty.

Comment

Whilst it might seem perverse that those schemes with CPI-linked liabilities that tried to hedge their liabilities are being hit worst, that is the reality and the PPF’s figures give a flavour of the impact on affected schemes and their members.  All other things being equal this could also lead to higher levies being required from UK DB schemes in order to fill the gap, as we highlighted in our recent paper.

Back to the top

New Government working group to look at DC Small Pots problem

The DWP has launched a working group to “assess and make recommendations” on ways to deal with the proliferation of small DC deferred pension pots.

The Government intends that the working group will report this autumn “with an initial assessment, recommendations and an indicative roadmap of actions for industry, delivery partners and Government”.

Following the DWP launch, the PPI published a Briefing Document intended to support the DWP working group.  It summarises the PPI’s report on the topic earlier this summer (see Pensions Bulletin 2020/31).

Comment

This is a short announcement about an important topic.  The problems of managing small DC deferred pension pots – which have proliferated since the introduction of auto-enrolment in 2012 and are expected to reach 27 million in the next 15 years – have been bubbling under the surface for some time, but have shot up the priority list this summer following publication of an earlier PPI paper about it and the Work and Pensions Committee writing an open letter to the pensions industry about the issue the following week (see Pensions Bulletin 2020/32).

Here at LCP we have been thinking about this issue and look forward to contributing further to the ongoing debate.

Back to the top

DWP asks how AE alternative quality tests for DB and hybrid schemes are working

The Government has launched a call for evidence on how the alternative tests that employers can use to demonstrate the quality requirement for DB and hybrid schemes being used for auto-enrolment (ie instead of having to prove that they meet the “test scheme standard”) are working.

The Government has to review these regulatory requirements every three years and the last review was at the end of 2017 (see Pensions Bulletin 2017/53).

The call for evidence asks three questions: whether the alternative quality requirements are delivering the intended simplifications and flexibility; who is carrying out the test (ie the employer via self-certification or its professional advisers); and whether there is anything else the Government should know about their operation, including any previously unforeseen issues when compared to the test scheme standard.

Comment

This feels like a routine review.  Unless any unforeseen problems are brought to light as a result, we expect no change to the DB/hybrid alternative quality requirements in the short term.

Back to the top