Pension Scheme funding holds strong despite soaring short-term inflation eroding the value of members’ benefits

Pension Scheme funding holds strong despite soaring short-term inflation eroding the value of members’ benefits

16 Nov 2022

• RPI hit 14.2% and CPI reached 11.1% this morning as the UK continues to battle rising prices.
• However, with expectations of longer-term inflation actually lower than this time last year, liabilities of DB pension schemes have fallen by just over £60bn year on year.
• Such lower levels of inflation can’t come soon enough as many businesses continue to face significant headwinds.
• Total insolvencies in England and Wales have reached their highest level since 2009 this year, with corporate insolvencies in October 2022 nearly 40% higher than this time last year.
• There are 4.5 million pensioners receiving defined benefit pensions which are unlikely to keep pace with inflation due to caps in place.
• The level of these caps vary from scheme to scheme but when applied could mean the equivalent of £35bn of pension income is lost in real terms across all private sector UK defined benefit schemes.

Charlotte Jones, Senior Consultant at XPS Pensions Group, said: “Most defined benefit pension schemes are doing well in the current climate - XPS’s DB:UK funding tracker estimates that schemes currently have over £40bn of surplus funds following a sustained period of rising gilt yields, despite the market turmoil seen in recent months.

“At XPS we’re seeing schemes working with companies to explore additional pension increases and support their pensioners through the cost-of-living crisis. In contrast, the level of company insolvencies in the UK is increasing. Trustees need to continue to monitor the financial strength of the companies supporting their pension schemes, particularly as the recent falls in pension scheme assets could mean that for some schemes long-term security is still a long way off.”