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DB members could miss out on pension income due to inflation caps

DB members could miss out on pension income due to inflation caps

14 Sep 2022

Tom Birkin, Actuary at XPS Pensions Group, said: “For current pensioners, sustained periods of high inflation will compound the effects of pensions not keeping pace with rising prices.”
“Pension schemes should explore options to support their members through this challenging period. Those who are able should consider whether they can provide financial support to their members, via additional increases to pensions above the caps in place.”
Defined benefit pension scheme members could miss out on £25k worth of pension income due to inflation caps 
•    An analysis from XPS Pensions Group DB:UK Funding Watch estimates that, despite significant improvements in funding levels this year due to rising interest rates, rising long-term inflation expectations have added over £100bn to pension schemes liabilities since the end of July.
•    However, the majority of increases to member’s pensions are based on short-term measures of annual RPI and CPI, which hit 12.3% and 9.9% respectively this morning as inflation continues to be elevated compared to recent trends. 
•    Due to the caps on inflationary pension increases in place, most pensioners will not see a corresponding rise in their annual pension, with caps of around 5%, or lower in some cases, expected to bite.
•    XPS estimates that the average pensioner in a private sector defined benefit scheme will miss out on around £1,200 p.a. of income due to pension increase caps biting over the next 2 years. This equates to around £25k of missed income over a lifetime for a pensioner aged 66, the current State Pension Age, due to current high levels of inflation.

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