Inflation a big concern for pensions

By Gareth Jones

As the world continues to focus on events in Ukraine, the impact of Russia’s invasion is beginning to be felt at home in our economy and in the cost of living.

For the pensions sector, as with many other sectors, the immediate impact concerns inflation. UK inflation (along with global inflation) had already been running high post-pandemic, as supply chains have been stretched to cope with pent-up demand. The fallout from the war in Ukraine and Russian sanctions is likely to push this significantly higher. Official ONS figures put CPI inflation at 6.2% in February, but the OBR have forecasted that it is expected to reach 8.7% by the end of 2022 – representing a 40-year high.

How these figures affect people’s pensions depends, in part, on the pension type. In Defined Benefit (DB) pensions, incorporating inflationary rises is the responsibility of scheme trustees, whereas in Defined Contribution (DC) schemes, the individual bears the impact. And the impact will be significant -- investment returns are very unlikely to outperform inflation numbers approaching 9%, meaning widespread reductions in the value of many people’s pension. Cost-of-living concerns will also impact pensions in other ways -- squeezed household finances are likely to prompt many to access their pensions earlier, utilising pension freedoms or transfers, which, in turn, will cause wider issues for the sector.

SEC Newgate Insights showed State Pensions with the greatest number of mentions with nearly 700 stories online. Much of this was relating to the Government’s Spring Statement with a focus on the cost of living. The headline measures announced by the Chancellor included an increase in National Insurance threshold and a reduction in fuel duty. Yet, there was little in his statement directly related to pensions and some commentators, such as consumer champion Martin Lewis, have noted that further measures will be needed to support struggling households – stressing that the UK is “on the brink of a financial precipice.” You may read SEC Newgate’s full briefing on the 2022 Spring Statement here.

Elsewhere, it is fair to say that markets and policymakers are still coming to terms with the longer-term consequences of the war in Ukraine. This extends to issues such as ESG. For instance, what happens to ESG investment approaches if energy security is prioritised over decarbonisation? Or if there is greater emphasis on governance policies following widespread Russian sanctions? These issues may need to be considered by pension schemes, particularly as many of them are in the process of implementing reporting requirements. In that respect, it was interesting to note the comments by Conservative MP, Alexander Stafford (Chair of the APPG on ESG) who stated, earlier in March, that the government is preparing to regulate to achieve consistency on ESG across the private sector.

How this is taken forward remains to be seen. There would be many who would welcome a more consistent approach to ESG reporting. Other, perhaps, may be more sceptical of further reporting regulations from the government.