Industry view – Pensions Policy Institute


Daniela Silcock is head of policy research at the Pensions Policy Institute (PPI)


PENSION SAVERS AND INFLATION: FACING REALITY


I have been spending a lot of time think- ing about inflation recently. A concept that may have seemed purely theoretical to many people is becoming a practical reality for those who are struggling to afford the petrol they need to get to work and are having to choose between heating and eating. I am most interested in the impact on pensioners who have fewer options for generating extra income than those in working life as they are generally not in a position to increase their income through earnings and instead must depend on the rules and regulations of those who provide their state and private pension.


Each pensioner will have a different port- folio of income, generally a mix of state and private pension income with poten- tially some other sources such as non- pension savings or housing. These income sources will all increase by differ- ent levels. For example, those with defined benefit pensions will receive benefits that go up in line with CPI or RPI (subject to caps), income from defined contribution savings in the form of an annuity, draw-


down or other investments may or may not be inflation protected. State pension income should rise by earnings or more in each year, as it is “triple-locked” and should therefore rise by the higher of the increase in earnings, prices or 2.5% every year. There are several flaws in these arrange- ments. One obvious problem is that all pensioner income sources can go up by different indices, reducing the reliability of income and the likelihood that it will keep up with rises in not just prices, but also living standards (as represented by earnings). Another issue, which has become more problematic recently is that increases to state and private pensions take place in April or at the beginning of a company’s financial year, but are generally based on the increase in the relevant index as recorded several months earlier. In times of relatively stable inflation, this delay may cause some small loss, as the relevant index may rise by a fraction of a percent, which will affect pensioner spending power, but during rapid infla- tion the effect is more damaging. The state pension link to earnings was temporarily suspended this year due to an artificial jump in earnings produced by Covid-19’s effect on employment (but will be reinstated next year unless there are further policy changes). As a result, the state pension’s flat-rate elements (the new and basic state pensions) went up by the annual rise in CPI in September 2021 of 3.1%. But this rise did not occur until April 2022, when the annual rise in CPI had increased to 9%. Therefore, by the time the state pension increased its level, it was already almost 6% below the increase in


prices as measured by the CPI. The rise in CPI is unlikely to stay at 9% either, con- sidering that we are still experiencing global fuel and food shortages and that the war in Ukraine is still ongoing. This leads to questions about whether current arrangements are fit for purpose during times like these, or whether we need to re-think how we increase pen- sioner income when inflation is rapid. One way of ensuring that pensioner incomes do not fall too far behind actual cost rises is to inflate pensions more fre- quently. The government and employer pension providers could monitor inflation and if rises of more than a few percent occur, trigger a new benefit increase exer- cise, or increases could just be set to take place twice a year or quarterly until infla- tion begins to stabilise. Without changes to policy, or safety nets of some sort, pensioners on low income are likely to struggle to meet basic needs and as prices continue to rise will sink further into deprivation. The ramifica- tions for this are not just short-term pain for those affected, but also long term as the social care system and NHS will see their caseloads rise if pensioners are not given sufficient income to take care of their basic physical needs. I am hoping that an effective policy solution is identi- fied and acted upon that will help ensure this current inflation crises does not cost the wellbeing of some of society’s most vulnerable members.


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