Govt urged not to 'rush into decisions' on state pension increases amid inflation decline

The government should prioritise fairness and avoid hurrying state pension increases, after inflation fell to its lowest rate in almost four years, according to Aegon.

The inflation rate dropped from 1.5 per cent in March down to 0.8 per cent in April, its lowest level since August 2016, the Office for National Statistics’ (ONS) Consumer Price Index (CPI) revealed.

Aegon pensions director, Steven Cameron, said that, along with Labour Market Statistics showing a drop in average earnings, the new inflation figures were “likely to increase pressure to review the ‘triple lock’ increases to the state pension”.

Cameron continued: “Under current rules, the state pension is increased by the highest of earnings growth, price inflation or 2.5 per cent a year.

"However with likely dramatic changes and significant variability in both price inflation and earnings growth in the coming months, there is a question over whether the government will see it as both fair and affordable to guarantee state pension increases of at least 2.5 per cent a year.

“While the coronavirus crisis is raising major challenges for the UK’s finances, we are urging the government not to rush into any decisions on state pension increases just yet but instead to consider a package of borrowing, benefit and taxation measures which must be fair across generations and sectors of society.”

Kempen Capital Management senior LDI portfolio manager, Robert Scammell, pointed out that the drop in inflation could be a “double-edged sword” for pension funds, noting that inflation linked cash flows they have to pay out will be lower but adding that “lower inflation can lead to lower gilt yields and thus a higher liability valuation and lower funding levels”.

Scammell commented: “Whilst lower inflation is likely to be a flat (or slightly positive) outcome for most pension schemes, negative inflation will be unequivocally bad for their already frayed funding levels with their hedging assets falling, but their pension obligations almost always prevent them from applying a negative inflation rate.

“However, looking ahead investors may want to look past this brief period of deflation, as we expect higher inflation to be more likely over the medium term.”

The experts were also keen to point out that the inflation figures might not be properly reflective of the true situation, with Cameron stating that “many of the products and services that make up the basket of goods used to calculate inflation can’t be accessed or demand has fallen to near zero”, meaning that changes might need to be made to the way inflation is calculated “if the situation persists for any length of time”.

Killik & Co associate investment director, Rachel Winter, said: “As the government extends the furlough scheme and businesses face the threat of issuing redundancies, individuals are feeling a substantial amount of pressure over job stability and wage growth.

“Although March’s further rate cut was an effort to lower the cost of borrowing, the situation is rapidly changing and we need to keep a close eye on pricing, consumer spending habits and the essential ‘super products’ to truly understand what the future cost of living holds for us.”

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