The Office for National Statistics (ONS) has today published Consumer Price Inflation (CPI), February 2015. The bulletin shows that for the first time in the history of the CPI index, prices have experienced zero rate inflation over the last year. Commenting on the statistics,
Richard Gibson, Associate at Barnett Waddingham says:
“As many pensions became linked to CPI by the coalition government in 2010, low inflation can mean lower payouts for pension scheme members. This could be good news for some pension schemes and employers who are struggling with increased liabilities.
“However, we have to look for the reason behind the fall in the rate – the Bank of England have observed that inflation is being suppressed by the recent fall in oil prices. Fuel prices influence more than a quarter of the CPI household basket of goods so they have a major effect. As the oil price rises again, CPI could quickly return to a more ‘normal’ rate of inflation in the next few months.
The ONS have identified recreational goods, food and furniture & furnishings as key contributors to the fall in inflation.
“Many pension schemes set their benefits according to the rate of inflation each September, by which time we could see CPI back closer to its 2% target. Those more likely to be affected are former employees of insolvent companies who are receiving compensation from the Pension Protection Fund (PPF) lifeboat. The PPF pays out increases based on inflation in May each year so a dip lasting a few months will mean lower pensions in future for them.
“But low inflation could also spell bad news for pension schemes and corporate sponsors – more than 40% of the index-linked bonds that pension schemes use to protect themselves against inflation pay out each year based on the February inflation rate – a temporary dip in RPI inflation during February will mean pension schemes not getting the full inflation protection they are looking for.”
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