Employers have been urged to consider how to support pension savers who face being left out of pocket by soaring inflation, which threatens to overtake annual growth in funds.
It has been reported that some FTSE 100 firms are considering the option to implement discretionary top-ups to counteract the impact of inflation on pensions, as the consumer prices index (CPI) soared 6.2% in February 2022 – reaching a 30-year high.
Raj Mody, PwC’s global head of retirement and pensions consulting, told business publication City AM: “We’re going to get a raft of pensioners who are going to get their letter with an explanation that rather than 6 or 7% growth in line with inflation, it will only be 3%.
“I spoke with two FTSE 100 companies this week who said they are looking at discretionary top-ups if this rate of inflation continues.”
Edd Collins, pension director at Willis Towers Watson, added: “We’re certainly seeing a lot more interest and consideration around discretionary increases.
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“A lot of schemes pay in line with inflation rates in September, so we may not see this really hit until next year.”
David Brooks, technical director at pension and employee benefits provider Broadstone, said high inflation would likely result in a real-terms cut for many pension schemes.
“The expectation that inflation would be transitory has been proved wrong and high inflation looks set to endure for the year. This will impact short-term benefit payments for members with inflationary increases lower than the current level of inflation during 2022, but higher expected increases for next year,” he said.
“It is quite common for benefits earned before 1997 to not increase. The last time we had a period of high inflation, schemes had surpluses and were able to give discretionary increases. With the level of surpluses in schemes a lot lower, the ability and appetite to do this may be curtailed. Trustees may want to consider, together with the scheme sponsor, whether any action can be taken.”
Employers, pension trustees and sponsors of defined contribution (DC) pension schemes should consider how they might advise employees that are worried about the impact of inflation on their pension funds, particularly those approaching retirement, Rachel Meadows, head of proposition, pensions and savings at Broadstone, told Personnel Today.
“Trustees and sponsors of DC schemes might wish to consider providing further guidance to members selecting their own investments outside of the default fund arrangement, as the perils of investing in perceived ‘safe’ cash or deposit funds are at their starkest while inflation is high,” she said.
“Members who are not armed with sufficient information can inadvertently make selections which can significantly disadvantage them.
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“Looking to traditional retirement options, rising inflation makes seeking advice at the point of retirement even more essential. For example, for savers who are looking to use their pension pot to buy an annuity, careful comparison is needed between selecting a ‘level’ annuity (that won’t increase in payment amount each year through retirement) and one which factors in an element of inflationary uplift.”
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