Market Economics | Interest Rate Strategy - BNP PARIBAS ...

GBP: Market Downplays Shift to CPI
• Government’s shift to CPI indexation in
pensions causes uncertainty over impact on
private schemes given their complexity.
• Limited market impact given underlying
ALM gap. But changes are material enough to
trigger a significant correction in our view.
• STRATEGY: Sell 30y BE at 3.40% into 30y
syndication – Target 3.10%. Favour 10/30y cash
BE flatteners.
DWP Statement on moving to CPI for Pensions
“On 8 July the Minister of State for Pensions, Steve
Webb MP, made a Written Ministerial Statement to
Parliament which announced the Government’s
intention to move to using the Consumer Price Index
(CPI) as the measure of price inflation for the
purposes of regulating occupational pension
schemes. A statutory minimum requirement will
continue to apply to the revaluation and indexation of
pension rights.
The proposed changes will affect how many deferred
pensions are revalued in future, and how pensions in
payment are increased. The changes apply to
defined benefit rights in occupational pension
schemes, and certain defined contribution rights in
occupational pension schemes. The changes will
affect the statutory minimum requirement for
revaluation and indexation; occupational pension
schemes will still have the freedom to pay more than
the statutory minimum.
In broad terms, a revaluation order is made each
year which sets out the minimum rate at which
occupational pension schemes should generally
revalue deferred pension rights and pay increases on
pensions in payment.
For deferred pension rights, the order tabulates an
overall revaluation percentage relating to each
possible number of complete years between the end
of someone’s pensionable service and their normal
pension age. The order that is in use for any year will
use data on price inflation up to September of the
previous year. For example, the order in use for 2010
uses data on price inflation to the year ending 30
September 2009 based on RPI. The order which will
be in use in 2011 will use data on price inflation to
the year ending 30 September 2010 based on CPI.
The overall percentage that will apply to deferred
pension rights which have been deferred for at least
two complete years, where the relevant years
straddle the change from RPI to CPI, will therefore
be calculated as a combination of percentages based
on RPI and then CPI.
The order in use for 2011 will also be used to
calculate annual increases on pensions in payment
for 2011, and these will be in line with CPI. The
Government expects to publish the order in
November or December 2010.
The Government will bring forward legislation at the
earliest opportunity to ensure that other references to
price inflation in pensions law are consistent with
using CPI as the measure of price inflation from 2011
or as soon thereafter as Parliamentary time allows.
For example, the Guaranteed Minimum Pension
Increase Order that will come into effect in 2011 will
be made on the basis of the CPI figures for the year
to 30 September 2010.
Examples:
The following generalised simplified examples are
provided for illustrative purposes only.
These examples illustrate how these changes could
apply to future calculations of the revaluation and
indexation applying to pension rights, if a pension
scheme adopted the statutory minimum approach.
They would not affect pension payments already
received. They do not deal with issues arising from
contracting out from the State Second Pension. The
detailed rules on revaluation and indexation vary
between pension schemes and can be higher than
the minimum. They also depend on when the
pensionable service took place. Other factors may
affect an individual’s pension entitlement depending
on that scheme’s rules.
A is a pensioner member of a pension scheme. His
pension has been in payment for three years, and he
has been receiving increases related to RPI. From
2011 his future increases will be calculated in relation
to CPI. This does not affect his previous increases.
B is a deferred member of a pension scheme. She
left pensionable service five years ago. When she
reaches normal pension age, her rights will be
revalued in relation to RPI in respect of the first five
years after she left pensionable service, and then in
relation to CPI until normal pension age. Once her
pension has been put into payment, she will receive
annual increases calculated in relation to CPI.
Herve Cros/Shahid Ladha 16 July 2010
Market Mover, Non-Objective Research Section
39
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