The UK is currently seeing soaring inflation, with record drops in wages, and prices for goods and services sky-rocketing, resulting in a keenly-felt “cost of living” crisis. But what is the impact for UK occupational pension schemes?

The consumer price index (CPI) measured inflation at 9.1% at the end of May 2022, the highest level seen since February 1982. Governments have traditionally sought to counter rising inflation by increasing interest rates, to encourage people to spend less and save more, as recently seen in the Bank of England decision to increase the base rate from 0.1% to 1.25%. With inflation expected to continue rising this year, below-inflation pension increases look set to become the norm, but does this accord with trustee fiduciary duties? At the very least, some consideration of the impact on schemes is likely to be needed. We explore further the impact of high inflation and interest rates on pension schemes below.

What is the effect of rising inflation on defined contribution schemes?

The ultimate effect of rising inflation is that, in real terms, defined benefit scheme (DB Scheme) members are likely to be worse off. For the past 30 years, DB Scheme members have largely been protected from inflation rises as private sector DB Schemes often increased and revalued benefits in line with inflation. However, these increases have historically been capped and fall well below the soaring rate of inflation, now eroding this protection. Accordingly, trustees of DB Schemes may wish to review the impact on their members and communicate where necessary to make members aware of this issue, and any measures proposed to address it.

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