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Spiders from Mars? Is high inflation taking us back to the 1970s?

David Bowie’s backing band in the 1970s were called Spiders from Mars and, for those of us old enough to remember, the financial and political climate today is reminiscent. Rising inflation (anticipated to reach 18% next year) and interest rates combined with industrial unrest and Russian military pressure in Europe all echo back to the Cold War period of the 1970s.

In a recent survey, Cushon clients admitted their biggest concerns are rises in utility bills, cost of living and fuel costs with many considering cutting everyday living costs, selling possessions and stopping saving and investing. The ‘cost of living crisis’ is pervasive - national insurance, council tax, energy, broadband and phone contracts, mortgages and Royal Mail stamps - you name it, it’s being affected. The spider’s web is everywhere.

The media is full of advice from experts on beating the cost of living crisis. Even Which? offered free advice to subscribers worried about rises earlier this year. Financial education organisation, Better with Money, reported employers are increasingly offering financial education and wellbeing programmes to help employees alleviate money worries, which can affect work performance and mental health.

Against this background, the Conservative party leadership contest is gathering pace and politicians are discussing tax cuts, which some say will be further inflation-fuelling. Independently, the Base Rate is predicted to increase again, perhaps to over 3%, as the Bank of England tries to manage inflation back down to 2%.

The impact on pensions and retirement plans

High inflation – and the other aspects of our 1970s-seeming backdrop - impacts pensions in many ways. At a member level, research shows 51% of people focus on current needs and wants at the expense of providing for their future and the number of savers opting out of their company pension scheme has increased by 29% from March to July this year.

We’re working with clients to communicate the importance of employees remaining active members of their pension scheme. Whilst opting out now to use money that would have been used for pension contributions to help meet daily bills may be tempting, failing to save now and losing your employer’s contributions will simply store up problems for the future.

People are reconsidering retirement options too. Whilst the Covid pandemic saw many take early retirement, high inflation may make those who were expecting to retire soon re-think. If a member retires early, they forgo a year of revaluation in exchange for a pension increase.

Revaluation is capped on a cumulative basis. As we’ve had such low inflation for some time, there’s considerable headroom for high inflationary figures to feed through. On the other hand, pension increases are capped on an annual basis meaning a member retiring early could miss out on a sizeable chunk of benefit.

On the other hand, for members of a defined contribution (DC) pension scheme, annuity rates are offering better value following the interest rate rises – improving by 20% in 2022 according to This is Money.

Adapting to high inflation

Similarly, trustees of defined benefit (DB) pension schemes have experienced a 20% fall in the liability values too linked to gilt yields and widened corporate bond spreads. Investment returns are impacted by the relative levels of equity exposure in falling markets and level of hedging in liability driven investment (LDI).

Pension trustees will be looking at inflation beating investments as part of their fiduciary duty, whether the scheme is DB or DC. Master Trust provider, NOW: Pensions has recognised its investment benchmark needs to outperform inflation and not cash, moving from cash plus 3% to the higher return of Consumer Price Index (CPI) plus 4%.

Whilst the buy in/buy out market is particularly attractive right now, many schemes are conducting business as usual. Pension trustees will be mindful limited price indexed (LPI) pension increases will not be matching inflation so a discussion with the scheme sponsor about awarding a discretionary increase may be needed. Deferred pensions will be eroded by long term high inflation and transfer value factors will need reviewing.

Similarities, but not the same

Setting aside the increase in strike action and media asking if we’re heading for a second winter of discontent, it’s not all doom and gloom. Barnett Waddingham doesn’t expect a repeat of the 1970s, despite the highest inflation for 40 years, anticipating inflation to fall below 2% by mid-2024. They highlight the key differences between then and now as the global economy being far less dependent on oil and labour markets having experienced several structural changes that make a wage-price spiral much less likely.

So, unlike the coincidental re-emergence of Wimpy on the high street, we’re not living in a Spiders from Mars retro era. Pension scheme investment is longer term than the predicted short-term recession and high inflation. As professional trustees, we’re mindful of the predicted recovery time when making short term decisions in view of a pension scheme’s overriding long term objectives. There’ll be no knee jerk reactions to high inflation here.



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