Low inflation can spell bad news for certain pension schemes, an adviser has warned.
Richard Gibson, associate at Barnett Waddingham, said it would affect the income of pension schemes with index-linked bonds as their cash flows are adjusted in line with inflation.
He said: "More than 40% of the index-linked bonds that pension schemes use to protect themselves against inflation pay out each year based on the February inflation rate - a temporary dip in RPI [Retail Price Index] inflation during February will mean pension schemes not getting the full inflation protection they are looking for."
He also said low inflation could hit pension scheme payouts, since the coalition government linked many pensions to CPI in 2010, though many schemes set their benefits according to inflation in September, by which time CPI could be closer to 2%.
Gibson said low inflation would affect employees of insolvent companies in receipt of lower pension income from the Pension Protection Fund.
"Those more likely to be affected are former employees of insolvent companies who are receiving compensation from the Pension Protection Fund (PPF) lifeboat. The PPF pays out increases based on inflation in May each year so a dip lasting a few months will mean lower pensions in future for them."
However, Gibson said lower payouts could be "good news" for some schemes and employers who struggle with increased liabilities.
According to the latest Consumer Price Index, prices have experienced zero rate growth over the past year. The Office for National Statistics, which published the data, said the main contribution to the slowdown came from prices for a range of recreational goods such as books and games, food, furniture and furnishings.
Ben Brettell, senior economist at Hargreaves Lansdown, said the rate would likely "drop below zero at some point in the coming months, and hover around zero" for most of the year.
