Retirement security globally is under increasing pressure, as inflation, a volatile market environment and low interest rates impact retirement pots, which could lead to defiined benefit (DB) members missing out on pension income.

According to Natixis Investment Managers’ 2022 Global Retirement Index (GRI), 2022 could be one of the worst years to retire as retirees risk not only taking retirement income from an already depleted pool of assets, but as they will have to take on greater risks with portfolios to make up the ground already lost.

In the UK, retirement security has declined for the fifth consecutive year, falling one spot in the ranking to 19 out of 44, with an overall score of 69%, down from 72% in 2021’s index.

The GRI – which examines the factors that drive retirement security, combining key indicators essential for people to enjoy a healthy and secure retirement – includes 18 performance indices, grouped into four thematic indices which cover key aspects for welfare in retirement: the material means to live comfortably in retirement; access to quality financial services to help preserve savings value and maximize income; access to quality health services; and a clean and safe environment.

For most of the past decade inflation has been exceptionally low. Between 2012 and 2020 inflation for the 38 OECD member countries averaged just 1.76%. However, in the first half of this year, inflation rose for those 38 countries, spiking at 9.6% in May 2022, with 9.9% annoucned this morning in the UK.

Andrew Benton, head of Northern Europe at Natixis IM, said: “While inflation has a negative impact on individuals, certain institutions may see an indirect benefit. Pensions generally perform better in inflationary times as central banks implement interest rate hikes to curb inflation. This is because of the seesaw effect that rates have on pension liabilities. In simplest terms: the higher the rate, the lower the liabilities.”

With rates increasing, Benton said, liabilities are shrinking for many, but not all pensions respond in equal measure.

“The maths on inflation ultimately works out for the better for private pensions. With inflation driving rates up and liabilities down, these managers generally see their contribution rate decline. On the public side of pensions, the maths may not be as advantageous,” he noted.

Focussing on UK DB members, 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.”

He suggested that 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.”

DB pension scheme members could miss out on £25k worth of pension income due to inflation caps, XPS has warned.

An analysis from XPS – 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 Retail Prices Index (RPI) and Consumer Prices Index (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 UK 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 DB scheme will miss out on around £1,200 per annum of income due to pension increase caps biting over the next two 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.

The latest digital edition of IPE’s magazine is now available