LPI Changes




	Insurance Marketing Department

With inflation having averaged little more than 2% p.a. over the last five years, a reduction in the value of Limited Price Indexation (LPI) to a maximum of 2.5%, from 5% might not seem a problem. But how many share the Government's confidence that long term rates of inflation will remain this low over the longer term? If the future brings a return of much higher inflation rates, this change could not only have a significant impact on the value of pensions in payment but, also those people still at work who have preserved pensions from previous employments.

The opportunity

Many people today have preserved pensions from previous employments, so the impact of LPI not only affects those who are retired, but a large number of those still at work. If we take a person with a preserved pension of £20,000 a year, who has ten years to go to retirement, 5% annual increases would take the expected pension to £31,026 a year. The same prospective pension increased by 2.5% a year would be worth only £24,977, at the end of the same period. That is more than £6,000 a year less. And with annuity rates at their current level, a fund of more than £120,000 might be required in order to purchase an index linked joint life annuity equal to this reduction in pension for a couple both aged 60 at the time - benefits reducing by one third on the first death.

That represents a substantial level of contribution over the next ten years - probably more than £600 a month. For anyone of 50, earning £30,000 a year, this level of contribution is just permissible, under the current rules.

Of course, for many people, other commitments might easily make a level of saving of this magnitude impractical. But the point is well made that any steps taken to narrow this potential gap is likely to be worthwhile.


	The problem becomes more pronounced, as time moves on. As can be seen from the chart, the gap widens progressively, so that after 15 years, the annual pension shortfall is more than £11,000 a year.

Our subject would require a fund of more than £200,000 to fill the gap on reaching 60 after that time.

There is, of course, another consideration, that average earnings tend to rise at a faster pace than prices. This means that even keeping pace with inflation will almost guarantee that spending power in retirement will grow at a slower pace than compared with earnings. This will now be even more pronounced, as LPI is limited to a level that is far below the rate of wage inflation, which has averaged almost 3.75% a year over the last five years. As a result, deferred pensioners will become progressively worse off, compared with those still actively building benefits under defined benefit schemes.

Action plan

There are clearly a number of both existing and potential clients for whom their future pension income has just become a bigger problem; and they need to know about it. Of course, IFAs will be undertaking regular reviews with all their clients, but this may well be an opportunity for being proactive. A campaign to create awareness could include:

Identify all clients who might be affected, by virtue of having discussed pension transfers with you, or for whom you have arranged AVCs. Similarly, you might be aware of scheme members who have not previously considered the need to make additional contributions.
Preparing a newsletter on the subject, either for e-mail delivery, or as a paper based exercise. In the former case, a simple PowerPoint presentation could be most effective, in the latter a short sales aid and case study would be adequate.
This is a good topic for wider marketing, both with professional introducers and the consumer directly, neither of whom are likely to have identified the potential problem. PR and advertising could follow the approach that "Growth rates for future pension benefits have been halved - have you escaped?"

This is a potentially massive marketing opportunity, which could easily lead to other classes of business, as well, should alternatives to pensions be seen as the better route. If you would like to put together a campaign to encourage clients and others to review their pension arrangements through a structured approach to asset allocation and stock selection, please contact us.