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UK inflation rate increase is bad news for pensions

Stuart Price, Partner and actuary, comments on UK inflation rate increase, and what this means for DB pension schemes.…

Stuart says: With UK inflation at a near four-year high, a nationwide financial services consultancy is warning that the deficits of UK defined benefit pension schemes will also increase.

The increase in CPI inflation for May was expected, and currently stands at 2.6 per cent [in July].

As well as the obvious reduction in disposable income, the increase will also have major implications on UK defined benefit pension schemes.

When valuing defined benefit pension scheme liabilities, one of the things taken into account is the investment markets’ long-term view of inflation.

Pensions generally increase each year in line with inflation and an increase in inflation means that a higher value is placed on defined benefit liabilities.

This, compounded with low interest rates, means that the deficits of UK defined benefit pension schemes are expected to get even bigger than they are at the moment.

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