From a business perspective, 2022 will likely be remembered as the year three different Prime Ministers reigned in the UK and the turmoil this induced. We saw the mini budget from Liz Truss and former Chancellor Kwasi Kwarteng in September which caused market mayhem, hitting confidence in Government bonds – known as gilts - which led to a sell-off. Investors started demanding a higher rate of interest to buy them and the Bank of England was forced to step in to temporarily buy more gilts. This intervention, along with the current Chancellor Jeremy Hunt’s decision to reverse most of the mini-budget, helped to stabilise markets.
With the yields on gilts now higher than they have been for over a decade, combined with an increase in bank interest rates, annuities are likely to make a renaissance. Annuities are where Defined Contribution (DC) pension savers give some or all of their DC fund to an insurance company at retirement in exchange for a guaranteed income. The high rate of gilt yields means that for every pound of DC fund given to an insurance company, the guaranteed income in return will be higher than it has been.
The rise in gilt yields also means that the calculation of Defined Benefit (DB) pension schemes liabilities has reduced, making them much better funded and, for many employers who sponsor these schemes, it means that they can pass their obligations to insurance companies (known as buy out). As well as good news for employers, it is good news for members of these DB schemes as their future pension obligations would be backed by very strong insurance companies giving members more certainty that their promised pensions will be paid in full.
Adding to this DB stability, will be the new DB funding code set to come into force this October which will support schemes in setting long-term, achievable objectives and reduce reliance on sponsoring employers.
Further legislation that will no doubt impact the industry this year is the Pension Regulator’s new single code of practice. While this will ensure pension schemes employ an effective system of governance and should reduce risks, it will also bring about further running costs for pension schemes.
Following its suspension last year due to a post-Covid surge in wages, the State Pension Triple Lock has returned and will mean pensioners receive a 10.1% increase in their State Pension from April 2023 in line with September 2022 Consumer Prices Index (CPI) inflation.
Soaring inflation, combined with the freezing of income tax and national insurance thresholds and the general increase in the cost of goods, could worryingly see many people reduce their pension contributions or even cease paying into a pension scheme altogether. While it may seem like an easy way to reduce outgoings now, cutting down pension savings will likely cause people financial issues in the long run.
Something that could help people see their predicted income in retirement and how important it is to save early, is the Pensions Dashboard. The long-awaited service looks set to finally go live in April this year and in the future will allow people to see what they’ll be entitled to from all their pension arrangements – including their State Pension – on a single platform at the touch of a button.
Alongside the Pensions Dashboard, education will be key to ensuring individuals understand that they cannot rely on the State Pension to see them through retirement. It is my personal belief that we need employers to play an important role here in educating their workforce about the importance of saving for their retirement, but we should start much earlier with financial education in primary schools. Will 2023 be the year the government – and new Minister for Pensions, Laura Trott - take steps to make this happen? Only time will tell.
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