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Limited RPI change factored into companies’ pension disclosures

February 7, 2020


London – 7th February 2020 – Companies with large pension schemes typically made a limited allowance for proposed changes to the Retail Prices Index when preparing their 2019 accounts, Willis Towers Watson has found.

Willis Towers Watson analysed the assumptions made by 61 clients who are either in the FTSE100 or have pension liabilities above £1 billion and who had financial years ending 31 December 2019. The consultancy found that assumed RPI inflation fell by around 0.25% across all scheme liabilities, in line with market movements over 2019. However, assumed CPI inflation, which is typically set relative to RPI inflation, remained broadly constant. The average gap between assumed RPI and CPI inflation over the term of the pension liabilities therefore reduced to 0.8%, from 1.0% a year earlier. Assumptions for the gap varied from 0.6% to 1.1%. Lower assumed RPI inflation reduces the value of RPI-linked pensions in company accounts.

On 4 September 2019, the UK Statistics Authority announced plans to align RPI with the CPIH measure of inflation (which should be similar to CPI) no later than 2030. The Chancellor has said that a consultation on whether to allow the change to be made earlier – potentially from 2025 – will be launched alongside the Budget on 11 March.

Bina Mistry, Head of Corporate Consulting in Willis Towers Watson’s GB Retirement business, said: “Neither financial markets nor UK plc appear to be reflecting full convergence of RPI and CPIH beyond 2030, in spite of the UK Statistics Authority’s announcement. Most organisations are effectively factoring in around half of the potential change from 2030, and none before that date. The effect on their overall RPI-CPI gap assumption is smaller still because a large proportion of pensions will be paid before 2030. However, different companies have taken different approaches, partly driven by auditor views.

We might see a further reduction in RPI-linked liabilities next year if it becomes clearer that the change will go ahead without pension scheme members being compensated – though there could be legal uncertainty for some time to come.”

Bina Mistry
Head of Corporate Consulting, Willis Towers Watson GB Retirement

“We might see a further reduction in RPI-linked liabilities next year if it becomes clearer that the change will go ahead without pension scheme members being compensated – though there could be legal uncertainty for some time to come. But even where liabilities come down, what happens to deficits and surpluses will also be affected by how well hedged schemes are and by what the changes do to the value of RPI-linked assets. Willis Towers Watson also found that a large majority of these organisations (86%) had not revised the previous year’s estimate of how ‘GMP equalisation’ would affect their liabilities. 69% estimated that commitments resulting from equalisation amounted to less than 1% of their pension liabilities, including 44% where the anticipated cost was less than 0.5%.

Last year, Willis Towers Watson’s analysis of accounting disclosures made by all FTSE350 companies with 31 December 2018 year-ends found that ‘GMP equalisation’ costs were on average assumed to be 0.6% of liabilities, equivalent to around £4 billion for the FTSE 350 as a whole.

Mistry said: “In 2018, the arrival of the Lloyds judgment towards the end of the year meant that liability impacts had to be estimated in short order. While a few companies have been able to finesse these numbers, many may wait until their equalisation projects are done and dusted before updating their interim assumptions. 2020 should be a year of significant progress on ‘GMP equalisation’ but that does not mean we should expect lots of change in next year’s accounts. As changes will not typically be that material, many may wait until they have nailed everything down and carried out a fresh valuation before updating investors.”

The average life expectancy assumed for a man aged 65 was 87.2 years, down from 87.5 in the same companies’ accounts last year.

Mistry said: “Most organisations switched to projecting future improvements to mortality rates using the CMI’s 2018 model, which gives lower life expectancies than the previous version. The next model update will take account of mortality experience in 2019. It had looked as though this would lead to a meaningful increase in life expectancy in accounts for years ending 31 December 2020. However, following heavy mortality in the final quarter of 2019, the effect is now likely to be very modest.”

About Willis Towers Watson

Willis Towers Watson (NASDAQ: WLTW) is a leading global advisory, broking and solutions company that helps clients around the world turn risk into a path for growth. With roots dating to 1828, Willis Towers Watson has 45,000 employees serving more than 140 countries and markets. We design and deliver solutions that manage risk, optimize benefits, cultivate talent, and expand the power of capital to protect and strengthen institutions and individuals. Our unique perspective allows us to see the critical intersections between talent, assets and ideas — the dynamic formula that drives business performance. Together, we unlock potential. Learn more at

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