Inflation increase will hit DB pension schemes

Defined benefit (DB) pension schemes are set to award maximum pension increases, the highest recorded level of increases for 17 years, due to rising inflation.

However, the additional and significant added financial burden will come at a time when most UK employers can least afford it. Marcus Hurd, head of corporate solutions at Aon Consulting, said: “The cost of providing such increases to UK pension schemes is likely to be around £25bn, of which only £15bn would have been budgeted based on company estimates of a 3% inflation rise.”

The Retail Price Index (RPI) is a key benchmark figure for pension increases. Most pensions are required by legislation to increase in line with inflation subject to a maximum of 5% on pensions earned between 1997 and 2005. The pension increases are designed to preserve the buying power of pensions up to 5% per annum.
Hurd said that while members of DB schemes will welcome higher pension increases, most companies would be reluctant to provide additional benefits in the current climate if they had a choice, and would prefer to wait until schemes are back on a stronger footing.