The continued reduction in the headline Consumer Prices Index (CPI) figure offers a welcome return towards stability for the UK’s defined benefit (DB) pension schemes, industry experts have stated.

Data from the Office for National Statistics (ONS) showed that CPI rose by 2.3 per cent in the 12 months to April 2024, down from 3.2 per cent in the 12 months to March 2024.

LCP partner, Steve Hodder, said that while the financial health of most DB schemes was “reasonably immune” to the level of inflation due to the way schemes typically invest, stability was always a good thing and will help with planning following a period of volatility.

“However, we're not out of the woods just yet,” he added. “Many analysts were expecting a larger fall, and the details behind the figures reveal that once you strip out the impact of the falling energy price cap, core inflation (in particular services) remains stubbornly high at 2-3 times the Bank of England's (BoE) target."

Broadstone head of policy, David Brooks, commented that the data showed inflation was within touching distance of the BoE’s target of 2 per cent, and interest rate cuts appeared to be around the corner.

“While the data will undoubtedly put a spring in the step of the many businesses and households who have been financially struggling with the raised prices of goods and services over the past few years, in the pensions universe, members will see now start to see their benefits go further and trustees will face less scrutiny over awarding discretionary increases,” Brooks continued.

“However, inflation’s return to pre-pandemic levels is against the backdrop of schemes having provided pension increases up to the cap that most schemes do. This does mean many, if not all, members won’t have had complete inflation protection of their pension.”

He noted that this has led to calls for DB schemes to share their surpluses with pensioners, but the request had gone “largely unmet”.

Furthermore, falling inflation has brought the possibility of reduced interest rates and gilt yields, and Brooks urged trustees to ensure they have the necessary interest rate protection in place to shelter the gains they may have made while interest rates and gilt yields were high.

“Depending on the gains made, this would require lower levels of leverage that may have been used previously ensuring the resilience of assets, something The Pensions Regulator has been keen to see,” he said.

“If this does come to pass it will be a challenge for those schemes that may not have fared so well in recent years, and they will be wanting to stay the course of their long-term strategy to secure member’s benefits and take advantage of their gains as they come.”

Aegon pensions director, Steven Cameron, highlighted that the figures were significant for the state pension triple lock.

“For the April 2024 increase, earnings growth in 2023 produced an inflation-busting 8.5 per cent increase,” he stated.

“In April 2023, a spike in inflation the previous year led to a record-breaking 10.1 per cent boost to the state pension. These increases and the underlying high volatility that was present in both price inflation and earnings growth, have since raised serious questions over longer term affordability of the state pension.

“With inflation having now fallen below the 2.5 per cent underpin, it’s likely to be earnings growth that determines next year’s triple lock increase, as the latest figures have this sitting at 5.7 per cent (for January to March 2024).

“If price inflation stays low and earnings growth also gradually falls back to levels more typical of the last decade, then the state pension triple lock formula may produce more predictable and affordable increases. This will make it less costly for the next government to commit to maintain it for a further five years. We may see lower rates of increases, but in times of lower inflation, the state pension doesn’t need to increase by as much to allow pensioners to maintain living standards.

“However, rather than a three-way comparison year on year, we’d recommend averaging the earnings component over a three-year period, which could smooth out excessive volatility and help ensure intergenerational fairness.”

---