Inflation rises help boost pensions
Rising inflation has helped ease the burden on defined benefit pensions, reducing the cost of benefits by around £10 billion during the past year, a consultancy firm said.
Aon Consulting said higher inflation reduced the expected costs of pension scheme benefits because most schemes target investment returns that are linked to inflation, but a significant proportion of the benefits they pay out are not linked to it.
Marcus Hurd, senior consultant and actuary at Aon Consulting, said: “The Bank of England is successfully keeping Consumer Prices Inflation at around 2%, but most pension schemes measure inflation using the Retail Price Index, which increased by around 4% last year.
“This environment of higher inflation is easing the burden on UK pension schemes, because many schemes benefit from broadly inflation-related investment returns while paying out benefits that are not fully linked to inflation.”
But while higher inflation is good news for company pension schemes, it is not necessarily good news for pensioners themselves.
Mr Hurd said: “Higher inflation may appear like good news for many pensioners, who will receive pension increases of around 4% on part of their pension this year.
“In reality, however, this increase only ensures that their pensions do not lose value in real terms. Higher inflation actually erodes the purchasing power of any part of their pension that is not directly linked to inflation.”
The group said the UK’s 200 biggest defined benefit schemes, which includes final salary pensions, had a collective surplus of £3 billion at the end of October, compared with a deficit of £61 billion 12 months ago.
It said this was one of the highest funding levels since the accounting standard FRS17 was first introduced in June 2001 and 49% of schemes now had assets that exceeded their liabilities.