The average private sector defined benefit retiree might be losing out on an annual income of £500, or roughly £8,000 over the course of their lifetime due to inflation caps, according to XPS Pensions.
The bulk of defined benefit pensions in the private sector will experience rises in 2023, according to XPS Pensions, based on statistics from last month’s inflation report, which showed that RPI had surpassed 12.6 per cent and CPI had reached 10.1 per cent.
The majority of the 6 million members who have not yet retired will see their pensions fully boosted by inflation. But the 4.5 million members who have already retired won’t because it’s likely that any increase in their pension will be capped.
The amount of these caps varies but is normally between 3 per cent and 5 per cent, suggesting that the average defined benefit retiree might be losing out on an annual income of £500, or roughly £8,000 over the course of their lifetime.
XPS Pensions Group senior consultant Charlotte Jones says: “Contrary to reports over the last couple of weeks, from a funding perspective most defined benefit pension schemes are doing well despite the market turmoil brought on by the mini-budget. XPS’s DB:UK funding tracker estimates that schemes currently have over £160bn of surplus funds following the sharp rise in gilt yields seen in the past few weeks.
“With schemes’ funding improving during a cost-of-living crisis, pensioners of defined benefit schemes may ask whether those excess funds could be used to help them pay their bills this winter. At XPS we’re seeing pension schemes looking at various options to support their members through this challenging period and especially to see if they can help those members that will see their retirement income fall in real terms.”
LCP Partner and inflation expert Jonathan Camfield says: “When it comes to DB scheme funding, the impact of inflation will vary hugely from scheme to scheme. But perhaps counterintuitively it’s not always bad news. For some schemes, and particularly those with limited and capped exposure to indexation, high inflation can actually be good news, especially if the assets side of the equation is boosted when prices rise. The more challenging impact comes for schemes with uncapped inflation increases, particularly if those schemes are not fully inflation protected in their assets. With the inflation outlook being so uncertain, it is important that schemes understand and review their exposure to inflation risk on a regular basis”.
