The surprise decision not to change how the Retail Price Index inflation measure is calculated could have added up to £20bn to the pension deficits of the UKs leading 350 companies, Mercer claimed yesterday.
Investment markets anticipating the change - which would have seen the RPI moved more in line with the slower-rising Consumer Prices Index - had reduced their expectations for implied long-term increases in RPI by 0.3%.
But, this was cancelled out by the National Statistician's decision to leave the measure unchanged. Mercer estimates the 0.3% a year increase in the implied rate of inflation resulting from last week's announcement will increase the aggregate liabilities of the FTSE 350 from £588bn to £608bn.
Ali Tayyebi, senior partner and head of defined benefit risk at Mercer, said: 'Most people expected the Office of National Statistics to announce a reduction in the RPI calculation and this would have materially improved the balance sheet deficits.
'The opposite has actually happened. Inaction has meant an increase in market implied inflation which has increased pension scheme liabilities by around £20bn.'
Mercer noted that the effect on individual companies would depend on the assets they hold. Firms with significant RPI-linked assets will find the value of those assets had increased, helping to cancel out the impact of their liabilities increasing, said Adrian Hartshorn, a partner in the consultancy's financial strategy group.
He added: 'There are also implications for risk management strategies. For example, those companies with triggers in place to buy matching assets based on inflation will need to revisit the triggers. Companies with CPI liabilities will need to think carefully as to whether RPI linked assets really provide the best match for their liabilities.'
The effect will also vary depending according to which inflation measure pension schemes are indexed against, with those using CPI not experiencing any increase in liabilities.