Trustees juggle payouts as inflation spikes

August 19, 2022

The UK's annual inflation hit 10.1% in July

Trustees are increasingly being tasked with reviewing benefits calculations for members, as double-digit CPI inflation erodes the value of savings.  

Direct Benefit (DB) UK Funding Watch recently revealed UK defined benefit long-term liabilities had decreased over the last three months, by approximately £100bn as long-term inflation expectations fell.  

Read Minerva's previous coverage of UK pensions:

https://www.old.manifest.co.uk/uk-pensions-to-disclose-climate-alignment-measures/

Inflation continues to impact a pension’s liabilities, with current levels driving up benefits.  

A drop in long-term inflation expectations meant funding levels were marginally improved over July, despite a meagre fall in gilt yields.  

DB UK Funding Watch highlighted that the majority of benefit increases would be based on short-term inflation rates published in the latter half of 2022, and expected to remain in double digits, meaning DB members retiring in early 2023 could see a material increase in their pension compared to those retiring at the end of this year.  

Charlotte Jones, XPS Pensions Group senior consultant, told Pensions Age that “a lot of trustees” were reviewing the way members’ benefits are calculated so losses incurred from higher inflation were limited. 

“For example, early retirement factors, which reduce a member’s pension on early retirement to allow for the pension being paid for longer, may not offer fair value to members in this current high inflationary environment,” she said 
 
“As a result, we are seeing many trustees adjust retirement quotes temporarily to ensure that members don’t miss out on vital retirement income.” 

The Office for National Statistics (ONS) confirmed on Wednesday (17 August) that annual inflation had hit 10.1% in July, up from 9.4% in June. 

Interactive investor head of pensions and savings, Becky O’Connor, told Pensions Age that as the amount withdrawn from a pension increases from £5,000 a year to £5,500, to cover price rises of 10%, consumer pensions could run out two years before expected, at age 83 rather than age 85.