UK High Court Says RIP to RPI | Chief Investment Officer

The U.K.’s High Court has shot down a challenge from the pension funds of BT, Ford and Marks and Spencer to overturn the government’s plans to alter the Retail Prices Index, which measures inflation.

In September 2019, the U.K. Statistics Authority announced that it would align the Retail Prices Index with the consumer prices index including owner occupiers’ housing costs, or the CPIH. The U.K. has been using the RPI to measure inflation since 1947, but in recent years this has been deemed inferior to the CPIH, which has been the U.K. government’s lead inflation indicator since 2017.

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The pension funds challenging the UKSA have substantial liabilities for index-linked pension payments, and are heavily invested in RPI-linked gilts as part of a strategy aimed at matching their liabilities. U.K. investment consultant Lane Clark & Peacock has said that the use of 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.

According to the pension fund’s complaint, there are 10.5 million people in the U.K. with private sector defined benefit pensions, a majority of whom have pension plans linked to the RPI. They estimate that those people will receive reduced payments amounting to approximately 4% to 9% of their lifetime benefits, with women experiencing on average a greater reduction.

The CPIH is expected to be around 1% less per year than the current RPI, which Lane Clark & Peacock said means that DB plan members with RPI-linked increases can expect to receive lower pensions than they otherwise would have from 2030, or possibly earlier. According to the pension funds, the anticipated 1% reduction in the RPI, affecting future interest payments to holders of the gilts, is said to have resulted in the value of the relevant gilts falling by approximately £90 billion to £100 billion.

The pension funds argued that the UKSA’s RPI decision falls outside the scope of its power to amend the RPI under the Statistics and Registration Service Act 2007. However, the High Court disagreed.

“The UKSA has the power under the SRSA 2007 to amend the RPI by bringing the methods and data sources of the CPIH into the RPI,” the ruling states. “That power includes the making of ‘fundamental changes’ to the coverage or basic calculation of the RPI.”

According to Lane Clark & Peacock, actuarial valuations, company accounting and long-term funding targets will be affected, while buy-in and buy-out insurers and consolidators may eventually charge less to take on RPI-linked benefits. The investment consultant also noted that plan sponsors should consider the issue carefully, particularly if they are involved in buying or selling index-linked gilts or similar swaps, buy-ins and buy-outs, changing the index used for pension increases, transfer value or pension increase exchange exercises and long-term journey planning.

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Tags: BT, Ford, Inflation, Marks & Spencer, Pension Funds, Retail Prices Index, RPI, UK, UK Statistics Authority, UKSA

The 300 largest pension funds in the world saw their assets under management increase by 8.9% to a record $23.6 trillion in 2021, according to a report from WTW’s Thinking Ahead Institute.

The Government Pension Investment Fund of Japan remained at the top of the list as the world’s largest pension fund for the 20th straight year, with assets of more than $1.73 trillion. Norway’s Government Pension Fund Global was second with just under $1.44 trillion, and South Korea’s national pension fund was third with just under $800 billion.

Despite the record in assets, growth has slowed from 11.5% in 2020. However, WTW’s report says this should be expected after the strong performance in the markets during 2020. Still, it was enough to increase the cumulative growth to 50.2% during the five-year period of 2016 through 2021.

“On the one hand, a new record for the world’s major pension funds illustrates the optimism that defied a global pandemic,” Marisa Hall, co-head of the Thinking Ahead Institute, said in a statement. “Yet on the other, growth is slowing and the long-term dashboard is flashing amber.”

According to WTW’s research, North America accounts for 45.6% of the world’s 300 largest pension funds’ assets, up from 41.7% at the end of 2020. European pension funds account for 25.9% and Asia Pacific funds account for 25.5%, while Latin America and Africa account for the remaining 4%.

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Nearly half (148) of the top 300 pension funds are from the U.S., and account for nearly 40% of the total assets under management. The U.K. is a distant second with 23 pension funds on the list, followed by Canada (18), Australia (15), the Netherlands (12) and Japan (11).

Defined benefit fund assets continue to account for the majority, or 63.5%, of the total assets; however, that share has gradually declined over the years as defined contribution funds (23.8%), reserve funds (11.8%) and hybrid fund assets (0.9%) have slowly increased their share.

The top 20 pension funds now account for 41.0% of the total assets, down slightly from the previous year, and on average invested approximately 53.5% of their assets in equities, 27.9% in fixed-income securities and 18.6% in alternatives and cash.

“While allocations to private markets declined compared with the previous year, we believe this was mostly caused by shorter-term inflationary and rate-hike fears,” Hall said. “We expect private markets will continue to expand considerably in the investment space over the long term, reflecting a need for new primary investment to support new models of sustainable economic growth.”

She added that the majority of pension funds are concerned about growing market volatility and are looking for additional ways to increase the diversity of their investments, specifically in the context of global economic slowdown.

“Looking ahead, rising inflation and subsequent central bank action are likely to cause global growth to falter, which may in turn endanger longer term the funding status of pension funds,” Hall added. “Pension funds are also under immense governance pressure from all sides, with a growing politicization of ESG in some regions meeting calls for more substantial and urgent climate action.”

Top 20 Pension Funds

	Fund	Market	Total assets ($MM)
1	Government Pension Investment	Japan	$1,730,900
2	Government Pension Fund	Norway	$1,437,111
3	National Pension	South Korea	$797,968
4	Federal Retirement Thrift	U.S.	$774,176
5	ABP	Netherlands	$630,358
6	California Public Employees	U.S.	$496,820
7	Canada Pension	Canada	$426,746¹
8	National Social Security	China	$406,787²
9	Central Provident Fund	Singapore	$374,990
10	PFZW	Netherlands	$315,467
11	California State Teachers	U.S.	$313,940
12	New York State Common	U.S.	$267,756
13	New York City Retirement	U.S.	$266,702
14	Local Government Officials	Japan	$248,572
15	Employees Provident Fund	Malaysia	$242,602
16	Florida State Board	U.S.	$213,792
17	Texas Teachers	U.S.	$196,727
18	Ontario Teachers	Canada	$191,140
19	National Wealth Fund	Russia	$180,690³
20	AustralianSuper	Australia	$169,055⁴

¹As of March 31, 2022; ²Estimate; ³As of January 1, 2022; ⁴As of June 30, 2021

Source: WTW