Pensions - Articles - Comments on inflation reaching highest point for 40 years


Comments on inflation reaching its highest point for 40 years from Canada Life, Aegon and XPS Pensions Group

 Andrew Tully, technical director, Canada Life commented: “Today’s inflation numbers will leave households across the UK reeling from the spiralling cost of living increases. With inflation expected to peak into double-digits later in the year, this cloud has no silver lining. Research tells us people are already changing their behaviours and tightening their belts, but the inflation peak, when it comes, only tells half the story. How long inflation remains high will determine our living standards for years to come.”

 Recent Canada Life research1 shows 88% of UK adults are already making cutbacks to ease the cost of living crisis.

 Seven in ten (70%) people have already reduced or are actively planning to reduce their energy consumption
 Almost two thirds (63%) have already changed or are actively planning to change their shopping habits and buy more own brand items
 Over half (54%) have already reduced or are actively planning to reduce their spending on other non-essential items.

 Other behaviours include a change or planned changes in lifestyle: about half (52%) are currently or will go out less often and a similar amount (51%) are currently or will eat out less often.

  Kate Smith, Head of Pensions at Aegon, comments: “Inflation increased to 9.1% in May, the 10th month in a row it’s broken the Bank of England’s 2% target rate, as the squeeze on people’s spending power continues.

 “Some small relief will come next month when the lower threshold of earnings on which employees pay National Insurance increases to £12,570, meaning those above this level of earnings will have an extra £29.70 per month in take-home pay. And households eligible for the government’s cost of living support package will receive their first lump sum payment of £326.

 “But despite this support, millions of people will be feeling the day-to-day impact of the prolonged period of rising prices not seen since the early 1980s* and will inevitable look for ways to cut back on spending where they can.”

 Pension impact of sustained prices rises
 “It has been positive that pension saving has remained relativity resilient during the covid crisis. However, the cost-of living-crisis could be the biggest challenge yet to pension saving and auto-enrolment putting the brakes on progress in this area, and worryingly we could begin to see a rise in those ‘opting out’ or cutting back on pension contributions to ease financial pressures. This could have significant long-term consequences, so it’s important people carefully consider the impact on their future finances before making any decisions to cut back on pensions.”
  

 Felix Currell, Senior Investment Consultant at XPS Pensions Group, said: “Against a backdrop of rising prices and tightening real wages, it is a tough time for schemes looking to invest, with the World Bank predicting a worldwide economic contraction. At the same time, with rates significantly behind inflation levels, ‘safe’ assets are also of limited appeal.

 “We have historically seen long-term equity investors rewarded for riding-out bear markets but would recommend that clients seek advice on how their investments can be structured to best manage their objectives.”

  High inflation continues to put stress on pension scheme investments
 • CPI this morning reached 9.1%, as inflationary pressures push prices higher, continuing the trend over the last few months.
 • Analysis from XPS Pensions Group’s DB:UK Funding Watch shows that inflation expectations have surprisingly reduced UK defined benefit long-term liabilities by around 0.2% over the last twelve months, as longer-term inflation expectations have remained fairly stable.
 • Instead, it is short-term inflation that has shown steep increases, with the Bank of England estimating that annual CPI could reach 11% later this year.
 • This provides members with higher yearly benefit increases, putting stress on liability hedging strategies used to protect schemes against such movements.
 • In addition, short-term inflation puts pressure on return-seeking assets to at least maintain their value as prices are eroded in real terms; the S&P 500 has dropped into bear market territory as markets continued to be volatile.
 • In the face of rising interest rates, growth stocks began to look increasingly overpriced this quarter and a natural rotation into value stocks (prepared much better to weather the rising inflation) occurred.
  

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