Changing RPI to CPIH Will Have Big Impact on UK Pensions

New inflation gauge will be ‘huge good news for some and huge bad news for others.’

The UK’s recent announcement that it will use a new method for measuring inflation will have “vast consequences” for pension plan sponsors and trustees, even though the change might not occur until 2030, said investment consultant Lane Clark & Peacock (LCP).

In September, the UK Statistics Authority (UKSA) announced that it would align the Retail Prices Index (RPI) measure of inflation with the consumer prices index including owner occupiers’ housing costs (CPIH). The UK has been using RPI to measure inflation since 1947, but in recent years this has been deemed an inferior determination of inflation compared with CPIH, which was adopted as the government’s lead inflation indicator in 2017.

CPIH is expected to be around 1% less per year than current RPI, which LCP said is a big difference, and means that defined benefit plan members with RPI-linked increases can expect to receive lower pensions from 2030, or possibly earlier, than they otherwise would have. LCP said actuarial valuations, company accounting, and long-term funding targets will be impacted, while buy-in and buy-out insurers and consolidators may eventually charge less to take on RPI-linked benefits.

“The change will be huge good news for some and huge bad news for others,” Phil Cuddeford, LCP’s head of corporate consulting, said in a statement. “Regardless of the impact for each scheme, sponsors who engage now will be best-insulated from future shock.”

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LCP is urging all plan sponsors to consider the issue carefully, particularly if they are involved in any significant pensions action such as buying or selling of index-linked gilts or similar swaps, buy-ins and buy-outs, changing the index used for pension increases, transfer value or pension increase exchange (PIE) exercises, and long-term journey planning.

The firm also said that year-end accounting assumptions for RPI and CPI must be set consistently to avoid unwanted volatility, and sponsors with upcoming year-ends need to address this immediately.

“As year-end approaches, it is important that sponsors keep in mind the upcoming inflationary changes,” said Cuddeford. “The switch may be some way off, but, given that we know it is coming, it would be foolish not to factor this into any decisions being taken now.”

LCP noted other key challenges for corporate sponsors:

Ensuring members receive their benefits without compromising shareholder value remains a significant challenge for corporate sponsors.
In September, corporate bond yields hit a record low of well below 2% – even lower than the previous all-time record in the aftermath of the Brexit referendum in 2016. For a company with a typical defined benefit plan, this will cause an approximately 20% increase in accounting liabilities.
Buy-ins and buy-outs are now becoming much more common than in the past. Each scheme is different, but this is an issue for companies to consider.
The International Accounting Standards Board is still considering changes that could bring significant extra liabilities onto the balance sheets of UK companies.
Recent IAS19 changes affect how companies account for special events, such as a change in benefits, redundancy exercise or M&A activity. The new rules can make the cost of events such as benefit changes more complex to calculate and harder to predict.

What Defines ‘Materiality’? CalPERS’ CEO Likens New SEC Disclosure Rules to Allowances in Sexual Harassment

Marcie Frost says SEC term is too ambiguous.

By Steffan Navedo-Perez

Earlier this summer the Securities and Exchange Commission proposed some significant changes to disclosure requirements largely intended to improve disclosures for investors and simplify compliance efforts for registrants.

The rules signify the first time in over thirty years that the SEC is looking to transform disclosure requirements for companies. As being such, people are playing close attention as to whether the SEC is doing it right, given the significant time lag between updates.

Marcie Frost, CEO of the California Public Employees’ Retirement System took the opportunity to represent the pension’s thoughts on the proposed “principled-based” disclosures, which could lead to ambiguity and less informed disclosures.

“The moves to principles-based disclosure could lead to more transparency, but could make it easier for registrants to avoid certain disclosures required under the existing rules,” Frost said in the letter. “Much depends on how registrants institute the changes and how the registrants apply the concept of materiality as transformed in the proposed rule.”

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Materiality, a principle metric measuring the degree in which information would affect the judgment of an informed investor, was a key concern in Frost’s letter.

To illustrate her point, Frost said: “consider sexual harassment laws where a registrant could argue that those laws are not material to its business but faces violations or allegations that could be material. Here, there would be no requirement to disclose a material compliance concern with an ‘immaterial’ law, regardless of the magnitude of the violations…While some might argue that double materiality is purely a theoretical or academic construct, we distinguish the proposed rule as having practical implications.”

“We opposed modifications to the use of materiality in a manner that reduces disclosures…Instead of clarifying materiality, the commission makes the concept substantially more confusing in a manner that would only benefit those trying to avoid disclosure. The commission does not use a single definition for the concept,” she said in the statement.

‘Double materiality’ is another such concept that she argues could be problematic, in response to the SEC’s claim stating otherwise. The theory relates to ‘layers’ of materiality whereby one action could be considered in some sense but not another, and reporters can choose which layer to follow when disclosing information.

Aside from materiality concerns, Frost brought up a few other situations the SEC shed light upon such as human capital management, and suggested they expand their current provisions to include the number of full-time, part-time and contingent workers, employee turnover rates, and diversity statistics. “While we would like to see this new focus result in additional transparency, we do not believe that the commission’s current approach will provide sufficient comparable disclosure to aid investors.”