Inflation index change results in £15bn pension liability windfall for FTSE 100

Many FTSE 100 companies are preparing to record windfall gains to reflect government changes in inflation measures for defined benefit (DB) pensions.

According to consultancy Towers Watson, the impact on FTSE 100 pension liabilities, estimated to be in excess of £15 billion, is due to the policy change that allows pension increases to be based on consumer prices index (CPI) inflation rather than retail prices index (RPI) inflation.

The average reduction in pension liabilities for large companies, which will base some pensions increases on the CPI inflation, is around 2.5%.

However, the impact for companies with 31 December 2010 year-ends ranges from 0.5% to 6%, and those with sizeable pension liabilities are more likely to record a higher-than-average effect.

Of the 42 FTSE 100 companies surveyed, 28 stated the way their scheme rules are written means at least some pension increases will now be based on CPI inflation rather than RPI inflation.

John Ball, head of UK pensions at Towers Watson said: “The government’s policy change has transferred wealth from pension scheme members to sponsoring employers, which are busy quantifying these windfalls on their balance sheets.

“The impact depends on the scale of legacy pension promises, the scheme’s rules and what its membership looks like. Some companies will not be affected at all, and we have seen those who are estimate gains that range a few million pounds to the billions.

“In most cases, the savings are limited because employers expect to use CPI only between the time a member stops earning new benefits and when they retire, and not once pensions come into payment but there are some exceptions.

“This is determined by the wording used when scheme rules were drawn up several years ago, which can be a historical accident.”

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