Steven Cameron, Pensions Director at Aegon, comments: “Today’s inflation figures should have offered state pensioners the prospect of a 10.1% double digit ‘triple lock’ increase in their state pension next April. This would have been welcomed after last April’s cancellation of the triple lock meant the increase then fell well short of increases in prices. But despite the government committing just last week to reinstating the state pension triple lock in full, it made clear last night that there could be a further U-Turn with nothing ‘off the table’ to help fill the gaping hole in public finances.
“If the government as signalled does renege on the triple lock for another year and opts instead for an earnings-linked increase, it will save around £4-5bn next year and every future year. It will no doubt be weighing up the reaction of pensioner voters in the run-up to the next general election. State pensioners will lose out on up to £8.50 per week (£442 per year) in payments, a double blow after last April’s increase of around half the inflation rate then.
“Right now, state pensioners remain totally in the dark and will be on tenterhooks as we all await an official announcement. The Government has said its latest tax U-Turns aim to create confidence and stability, so we’d urge the chancellor to offer this to the many vulnerable pensioners by including a final decision in his 31st October fiscal statement.”
How much will the state pension increase in April 2023 if triple lock maintained?
“If the commitment to the triple lock is maintained, those on the full new state pension will see weekly payments increase from £185.15 to £203.85 per week (£10,600 a year) and those on the full basic state pension will see weekly payments increase from £141.85 to £156.20 per week (£8,122 a year).”
How much will the state pension increase if inflation measure dropped and earnings increases used instead?
“If the inflation measure of the triple lock is dropped, and earnings increases used instead, those on the full new state pension will see weekly payments increase by average earnings of 5.5%. This means payments will increase from £185.15 to £195.35 per week (£10,158 a year), and those on the full basic state pension will see weekly payments increase from £141.85 to £149.65 per week (£7,781 a year).”
Andrew Tully, Technical Director, Canada Life commented: “A potential record-breaking increase to state pensions might well place the triple-lock in jeopardy as the new Chancellor, Jeremy Hunt, faces a monumental task in trying to balance the books. If the triple-lock is ditched for a second year in a row, this flip-flop on policy effectively breaks the promise, and the Government will need to find a way to try and appease a core part of the voting electorate.
“Our recent research suggested broad support to retain the triple-lock, with over half of the voting public supporting the idea. However, the research did reveal a significant generational divide in opinion, increasing significantly amongst the older generations with 78% of the over 55s agreeing it should be maintained, compared to just a third of 18-34 year olds.
“Whichever way the Government goes, the state pension is not hugely generous, and many people will want to make sure they have private provision to top up the state pension by taking advantage of contributions offered through an employer’s automatic enrolment pension scheme.”
Charlotte Jones, Senior Consultant at XPS Pensions Group, said: “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.”
Robert McInroy, Partner and Head of LGPS Clients & Markets at Hymans Robertson, says: Assuming no political intervention, today’s September CPI announcement will mean a 10.1% increase in LGPS benefits next April; the highest increase in a generation. Fundamentally this means more cash is needed sooner to pay pensions and an increase in liabilities.
“On the investment side, funds will need to closely examine their evolving cashflow requirements. It will be important to have up-to-date forecasting under a range of inflationary best-estimate and stress test scenarios. However, the open-ended nature of LGPS liabilities means the largest risk for most funds might stem from inflation remaining higher for longer and the challenge to earn a long-term rate of return above inflation.
“The funding side is dominated by progressing the 2022 LGPS valuations against a backdrop of inflationary and market uncertainty. Fortunately, the LGPS has time on its side. Therefore a long-term view can be taken for most employers when managing this type of short-term volatility and avoid it de-railing existing funding plans. However, funds will also need to carefully consider funding plans for shorter term employers to ensure this higher element of risk is incorporated. This should be done within a framework which is more responsive to changing conditions.
“After a decade of very low inflation, there is much for LGPS funds to do in order to quickly grasp and navigate the emerging issues.”
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