Truss commits to pensions triple lock as inflation hits 10.1%

Her announcement, at prime minister’s questions on October 19, appeared to contradict statements made by cabinet colleagues earlier in the week. Both chancellor Jeremy Hunt and foreign secretary James Cleverly said they could provide no assurance that the triple lock — which guarantees the state pension will rise by the higher of inflation, average wages or 2.5 per cent — would be retained.

The lady’s not for turning (yet)

The triple lock was suspended for 2022-23 after the relaxation of Covid-19 lockdowns led to an 8 per cent rise in average earnings. Maintaining the triple lock was included in the Conservative party’s most recent election manifesto. 

After such a trying time, pensioners need certainty about how their state pension will be uprated, and there still may be worries that given the pace of U-turns we have seen, this latest promise can’t be guaranteed

Helen Morrissey, Hargreaves Lansdown

Absent government U-turns, maintaining the triple lock at the current rate of inflation would see payments to those entitled to the full new state pension rise from £185.15 to £203.85 next April — though inflation is expected to rise further in the meantime.

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, welcomed Truss’s announcement as “a huge relief to pensioners who have been banking on an inflation-linked increase after their budgets have come under intolerable pressure in recent months”. 

“The prime minister had said she would keep the triple lock several times during her leadership campaign, but there were concerns that when faced with a gap in public finances the new chancellor might be tempted to shelve an inflation-linked increase,” she explained.

“After such a trying time, pensioners need certainty about how their state pension will be uprated, and there still may be worries that given the pace of U-turns we have seen, this latest promise can’t be guaranteed.”

Morrissey acknowledged that calls to reform the triple lock may grow louder in future, but cautioned that any such reform “will need to happen alongside consideration of how state pension age is due to be increased”. 

“A review on this issue has been submitted to government and is due to be published next year. Any changes to the triple lock will need to take its findings into account,” she said.

Inflation, inflation, inflation

October 19 saw the Office for National Statistics confirm that September’s inflation figure was 10.1 per cent, up from August’s 9.9 per cent and once again higher than the Bank of England’s forecast. 

The rise comes despite a slight fall in energy prices, made up for by increased inflation rates in food and other import sectors in particular, which are suffering from the depreciated value of sterling. 

The BoE, which maintains that inflation should begin to dissipate next year and be back at its 2 per cent target within two years, has repeatedly raised interest rates, most recently from 1.75 per cent to 2.25 per cent, though these increases have been lower than some market commentators expected and asked for.

The central bank’s response has been confounded to a degree by the fall-out from the so-called “mini” Budget, which was intended to afford space for tighter monetary policy but which, in the event, forced a reversal of the BoE’s plans to roll back quantitative easing. It embarked on a bond-buying programme, in part to bail out pension funds with liability-driven investment strategies that faced a liquidity crisis triggered by rising gilt yields.

Chris Arcari, head of capital markets at Hymans Robertson, said: “The large rise in the energy price cap in October means [consumer price index inflation] is expected to peak between 10 and 11 per cent year on year that month.  

“The outlook for inflation beyond the very near term has become less certain. In some respects, the undoing of the government-proposed fiscal loosening will mean lower inflation pressure in the medium term, potentially reducing the need for the BoE to act as aggressively.

“At the same time, the reduction in the energy price guarantee package means headline inflation could spike once more in April 2023.”

Arcari added that expectations for peak interest rates in 2023 have reduced to 6 per cent since the chancellor reversed much of the “fiscal loosening” proposed in the “mini” Budget. 

“At time of writing, markets expect the BoE base rate to peak around 5.3 per cent next year, while consensus forecasts suggest the bank may raise rates slightly less than this,” he said.

The effect on pension schemes

The impact on pension schemes and members from rising inflation and interest rates is expected to be mixed, with many members seeing inflationary increases to their pension payments but some, especially in public sector and defined benefit schemes, also subjected to a cap on those increases, typically set at 5 per cent.

Many schemes are at liberty to afford discretionary increases above the 5 per cent cap, and a Willis Towers Watson survey in July found that six in 10 schemes had already considered such a move. 

Discretionary increases carry a cost in terms of liabilities, however. In May, Aon estimated the cost could amount to £8bn, though Aon partner Lynda Whitneytold Pensions Expert in June that the cost had already risen closer to £18bn.

Responding to the latest figures, XPS Pensions Group said that most of the 6mn DB scheme members who have yet to retire would see a “full inflationary boost” to their pensions, but that the 4.5mn members who have already retired either would probably see their increases capped, typically at between 3 per cent and 5 per cent.

It said these caps meant that the “average DB pensioner” could end up missing out on annual income of £500, equating to around £8,000 over a lifetime.

XPS Pensions Group senior consultant Charlotte Jones said: “Contrary to reports over the past couple of weeks, from a funding perspective most DB pension schemes are doing well, despite the market turmoil brought on by the “mini” Budget. XPS’s DB:UK funding tracker estimates that schemes currently have over £160bn of surplus funds following the sharp rise in gilt yields seen in the past few weeks. 

“With schemes’ funding improving during a cost of living crisis, pensioners of DB schemes may ask whether those excess funds could be used to help them pay their bills this winter. At XPS we’re seeing pension schemes looking at various options to support their members through this challenging period, and especially to see if they can help those members that will see their retirement income fall in real terms.”

Ben Farmer, senior investment consultant at Hymans Robertson, noted that, though caps on inflationary increases for members are typically in place, “the index-linked gilts that many schemes hold as part of their risk management strategies have no such cap on their inflation linkage, so at the margins well-hedged schemes might expect to benefit from a funding perspective from high inflation”. 

“For less well-hedged schemes, this marginal gain from uncapped assets versus capped liabilities will likely be outweighed by the general increase in the liabilities from high inflation,” he said.

“For deferred members — ie, those who are no longer accruing DB benefits but who have not yet retired — the revaluation of their benefit entitlement is increased in line with inflation. Here, the annual caps are typically applied cumulatively, so deferred members stand to benefit to the full extent of (currently high) inflation, particularly if this persists over the medium term.”

He noted that conversations about discretionary increases have seldom been had since inflation was last a significant issue, back in the 1990s, and said schemes must balance “the desire to protect pensioner members in the current high-inflation environment, versus the increase in pension scheme liabilities this would cause, at a time when many DB pension schemes are already seeing funding challenges”.

Robert McInroy, partner and head of Local Government Pension Scheme clients and markets at Hymans Robertson, said that September’s CPI announcement means LGPS funds will need to “closely examine their evolving cash flow requirements”, but that most will be able to look to long-term risks rather than fearing short-term volatility.

Graham Crossley, head of technical business development at Quilter and an NHS pensions expert, said the rising inflation figures made it especially urgent that a fix be found for the NHS staff retention crisis, as “with this level of CPI, 2022-23 will have some of the highest annual allowance tax charges that healthcare workers have ever seen”.