Chris Arcari, Head of Capital Markets, Hymans Robertson, said: “While today’s release shows year-on-year headline CPI inflation unchanged from August’s release, it has generally stayed on a downwards trend this year and core CPI edged down slightly. Prior to release, swap markets still implied a c.50% chance of a rate rise at the November meeting and a 100% chance that rates will have been raised at least once, to 5.5% p.a., by the end of the year. However, attention is increasingly shifting from how far rates will be raised, to how long they will remain at current levels.
“Regardless of whether the Bank of England raises rates at either the November or December meetings, both the tone of the central bank’s comments and market pricing suggest that policy rates are at or close to peaking, but subsequent cuts will be gradual. Declines in energy prices have been a key contributor to the reduction in headline inflation over the last year, and so any reversal could slow the downtrend. Central banks might choose to ‘look through’ the immediate impact of a temporary, supply-driven increase in energy prices. However, the risk of second-round effects, alongside sticky core inflation and tight labour markets, are reasons why central banks may proceed cautiously with rate cuts.
“One potential positive from the recent downtrend in inflation, on the growth front at least, is that year-on-year wage growth is now positive in real terms. However, this is a double-edged sword: if real wage growth supports demand and feeds back in to price pressures, the Bank of England may be encouraged to keep rates higher for longer.”
Ben Farmer, Senior Investment Consultant, Hymans Robertson, said: “While the pace of price rises may have slowed versus this time last year, inflation remains elevated and, while falling, is expected to remain above target for some time.
“The September CPI release is particularly relevant for DB pension schemes, as it forms the basis for many schemes’ annual increases that will be applied from April 2024, meaning it’s of interest to pension managers, trustees, sponsors, and members alike.
“With the caps that apply to annual pensions increases in payment in the private sector usually set at 3% or 5%, persistent high inflation may mean well-hedged, mature DB schemes might see a slight funding gain, as their index-linked gilts have no such caps. For less well-hedged schemes, this second-order benefit will likely be swamped by the general rise in the liabilities from high inflation. The picture is more nuanced for deferred members (i.e. not yet retired), where benefit increase annual caps are typically applied cumulatively, and who likely stand to gain from the full extent of the current (high) inflation.
“As with last year, perhaps this morning’s release will raise questions among trustees and sponsoring employers about the potential for awarding discretionary increases to their members’ benefits. Many private sector DB schemes are focussed on managing their way towards a low risk ‘end game’ objective, be it run-off or an insurance transaction, meaning an unexpected increase in liabilities from the awarding of discretionary benefits is unlikely to be welcomed.
“With many schemes still in funding deficits, the focus for trustees remains first and foremost on paying the benefits defined in their scheme deeds and rules, particularly with the potential for further asset volatility in the coming months amid an uncertain economic and geopolitical environment.”
Phoenix Group’s Patrick Thomson comments: “September’s CPI figure completes the final part of the triple lock equation, and means, subject to any adjustments, the average earnings figure will deliver an 8.5% increase to the state pension come April next year.
“12.6 million people are currently in receipt of the state pension*, so any last minute tweaks to the triple lock will have a material impact on the day-to-day lives of millions of people, not least those for whom the state pension is their only source of income.
“More than a third of adults over 66 who are still in work expect the state pension to be their main source of income in retirement.” Is the future of the triple lock secure?
“When thinking about the costs of the triple lock and the state pension more broadly, the government needs to consider two important factors: how much people are paid through the state pension and what age they will receive it. Our polling for Phoenix Insights found the vast majority of adults (87%) believe the state pension is there to ensure everyone has a minimum level of income in retirement. Uprating payments via the triple lock has meant retirees’ income has kept pace with or exceeded rising prices and wages. However, its affordability has come into question following a period of higher inflation and stronger wage growth.
“Bringing forward the increase in the state pension age may be an alternative lever the government opts to pull to combat the affordability challenge. But any acceleration in the state pension age timeline needs to be coupled with further support for those most at risk financially and those least able to remain in work.
“We have recently explored public attitudes towards the state pension and potential policy interventions. What became absolutely clear is that any future changes to the system must ensure it is effective, fair and trusted
Dean Butler, Managing Director for Retail Direct at Standard Life, part of Phoenix Group said: “Inflation has been a scourge on the nation’s finances over the past two years and it’s still way above the Bank of England’s target. However, as the average earnings figure published last month is higher than 6.7%, State Pensioners are set to benefit from an inflation-busting 8.5% rise, taking the new State Pension payment to £11,501. There’s still a possibility that the Government will decide to exclude bonuses from the average earnings measure, as has been speculated, but even in that situation pensioners would still experience a 7.8% boost.
“However, it could be a case of ‘be careful what you wish for!’ as an inflation-busting State Pension will only fan the flames of debate around the long-term affordability of the payment. It’s also worth considering the possible tax implications for pensioners. The Personal Allowance, which is the amount of income you can receive before paying tax, has been frozen since 2021/2022 and currently remains fixed in for quite a few years to come. This means that the full State Pension payment has grown from 70% of the allowance in 2019/20 to a likely 92% next year, leaving pensioners with only £1,069 of headroom before they begin paying income tax.”
“While the state pension is on the up, it’s worth remembering that it still falls short of the £12,800 a single pensioner needs for even a minimum standard of living in retirement, according to the Pensions and Lifetime Savings Association. For our younger generations, one way to future proof their retirement saving is to a look at workplace or private pension provision and make sure to check it matches with their retirement expectations – there are a number of online tools and calculators that can help with this. However, the State Pension remains a lifeline for a great many people who will hopefully feel a little bit better off come the Spring.”
Henry Shore, Consultant at XPS Pensions Group, commented: “With this morning’s announcement that the annual rate of CPI inflation has remained unchanged over September, the key takeaway is one of short-term inflation remaining high and contributing to the cost of living crisis.
“XPS’s DB:UK funding tracker estimates that schemes currently have over £170bn of surplus funds on a low-risk basis. Consequently, some schemes are exploring the possibility of providing discretionary pension increases to support members that will see a second consecutive year of real falls in their retirement incomes. This also feeds into the ongoing debate on the Mansion House reforms and how changes to legislation could enable more flexible use of surpluses.”
Steven Cameron, Pensions Director at Aegon, says: “Today’s official figures from the Office for National Statistics showing year-to-September inflation of 6.7% has turned the heat up ahead of the Government’s official announcement, due next month, of next April’s State Pension Triple Lock. All signs point to a bumper year for State Pensioners, but coming at considerable cost to today’s workers.
“The official formula calculates the Triple Lock as the highest of year-on-year earnings growth for May to July (announced as 8.5% in August), a minimum rate of 2.5% or the 6.7% year-to-September inflation figure published this morning. This would see the State Pension increase by 8.5% for 2024/25.
“There are reports that the Government is considering adjusting the earnings growth figure downwards to reflect recent one-off public sector bonuses which have created a ‘distortion’. While trimming it back by up to 1% would save the Government money, it would risk the wrath of the pensioner population ahead of a likely General Election next year.
“An 8.5% increase would be the second-largest State Pension increase ever, after this April’s 10.1%, and would see the New State Pension jump by a bumper £901.02 to £11,501.22 a year. The ‘old’ State Pension, for those who reached State Pension age before 6 April 2016, would also rise by £690.40 to £8,812.80.
“But the boost is particularly large when considered in comparison to current inflation trends.
“While the year on year inflation was unchanged this month from last, it had previously decreased for three consecutive months, with the Government committed to reducing it to around 5% by the end of the year. This is still far above the Bank of England’s 2% target, so the headline rate may fall even further as we head into the early months of 2024. So a State Pension increase of 8.5% could well be double the ruling rate of inflation come next April.
“While an 8.5% increase would be welcome news for State Pensioners’ purchasing power, it would do little to quieten the growing concerns that the Triple Lock in its current form is unsustainable longer term. With the burden on current workers who pay for the State Pension through National Insurance increasing sharply, even if the Government refrains from fiddling with the figures this time round, today’s inflation figure will only amplify calls for whoever is in power after the General Election to review the Triple Lock to make it intergenerationally fair.”
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