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The Actuary The magazine of the Institute & Faculty of Actuaries

CPI change points to FTSE350 pension schemes surplus

Total FTSE350 scheme funding deficits could swing back into surplus by the end of the year due to the Consumer Prices Index inflation switch, Aon Hewitt predicts.

This month’s Aon Hewitt 350 Index showed the collective final salary pensions accounting deficit of UK FTSE350 companies was £44bn - the same level as the end of May.

However, the consultant estimated the 350 Index could be left with an aggregate surplus by the end of the year as CPI savings are accounted for over the next 12 months.

Aon Hewitt principal and actuary Marcus Hurd said: "In some senses the move from RPI to CPI may be the light at the end of the tunnel for sponsors of final salary pension schemes.

"As schemes move back into balance, companies may choose to protect the long-term future from a more stable position."

Companies are said to be assuming CPI will be 0.5% lower a year than Retail Prices Index inflation but Aon Hewitt said a better estimate is 0.7% lower - if these savings are incorporated total scheme deficits will be in surplus on an accounting basis by the end of the year.

Aon Hewitt also said this month’s index was noticeably volatile, fluctuating with the highest intra-day movement of £6bn.

Hurd added: "European sovereign debt concerns, the release of oil reserves by the International Energy Agency and continued fears over inflation have resulted in a volatile month for pension deficits.

"These macro-economic concerns have increased the volatility of the UK pensions accounting deficit, although the deficit of the FTSE350 pension schemes has ended up at the same level. This is making it difficult for pension schemes to plan for the long-term."

[Source: Professsional Pensions”