There have been many good years for pensions this century and most people find themselves much better off than they were when pensions were last formally reviewed by the Government in 2004.
But 2022 was a year when almost everyone took a step backwards
A bad year for pensioners
This was a year when most pensioners took a hit from inflation. The state pension was revalued at 3.1% as were most corporate pensions. Only those receiving pensions in publicly funded defined benefit schemes enjoyed full inflation protection.
Worst hit were the pensions bought by savers who had purchased a level annuity. After years of low inflation, the impact of getting no increase in an annuity this year hits hard. Similarly , those who have swapped increases in their defined benefit pensions for a cash sum, may now be feeling exposed to the full impact of cost of living rises,
The costs of living for those in later life rose fast , fuel bills and other costs of living meant that the standards of living for elderly people generally decreased. Pensioner poverty rose, the numbers visiting food banks rose by 400%.
A bad year for pension accrual
Wages too fell behind inflation meaning that those in final salary and CARE schemes have not accrued as much as needed to meet future costs, those in DC schemes will find their pension contributions have not automatically increased by inflation either.
The cost of living seems to have had (as yet) limited impact on auto-enrolment thought there are sectors of the workforce that have seen alarming numbers of opt-outs. The nursing profession reports over 4,000 nurses opted out of the NHS pension scheme over the past 12 months – many citing the impact scheme membership had on meeting expenses.
A bad year for pension pots
For most of us, the value of our pension is much easier to see than in years gone by, we have online access to the value of our pots , though many of us will not want to look, knowing that many pension pots will have fallen in value over the year.
The falls in pot values reflect the decisions taken by trustees and workplace pension providers and pretty well universal. Cash was the only shelter from falling values, equities, , properties and other alternative assets all saw falls in values. Bonds were a big loser, especially for in “de-risked” lifestyle strategies.
The rises in interest rates, both actual and anticipated has led to a sharp fall in corporate bond and gilt prices. The impact has been particularly felt in longer-dated and index-linked gilts, whose value was forced down sharply by forced selling by defined benefit schemes looking to maintain interest rate hedges.
Those relying on pensions to provide them with a consistent drawdown, especially those in the early years of taking money, could be depleting their funds at an alarming rate, the fear is of “pounds cost ravaging” (aka sequencing risk) which can blight future payments.
Though not often though of as “pots”, the assets that pay funded defined benefit pensions have also been ravaged. The prevailing estimate is that the cost of leveraged LDI to pension scheme assets was c£500bn.
A bad year for pension policy
Pensions were not immune from the changes in Government. We have had three DWP secretaries of state and three pension ministers. Similar turbulence has happened in the Treasury. Few would have forecast in January that a Government with a large majority would have had to change prime ministers twice this year.
These changes have put back the agenda for pension reform. The implementation of the auto-enrolment reforms will not now happen in this parliament and it looks like the forecast for “the middle of this decade” is also out of reach.
Aspects of the 2021 Pension Schemes Act have been progressed but crucial changes to Defined Benefit Funding have still to put before parliament and while TPR has rushed out its DB funding code, it is dependent on parliamentary approval of funding regulations. The LDI crisis in the autumn is causing a major rethink of how guaranteed pensions are funded.
For those anticipating a non-guaranteed pension , paid on a CDC basis, there has been limited progress, but still only one employer has applied to run one. The prospect of a retail version of CDC – where savers can swap pots for pensions has gained some traction but little has yet emerged by way of “product”.
And now the good news!
The good news is that the cost of buying a pension is now much lower than it was at the start of the year. This has meant that the valuations of pension schemes assets, despite the fall in value of the assets that pay them, have improved.
Similarly, if you are looking to buy a pension annuity, your pension savings will buy you more pension meaning that you may actually be able to buy a bigger pension – from a smaller pot.
And this is the same for defined benefit schemes, who are now looking much healthier according to liability valuations that benefit from increase interest rates. There looks to be a dash to buy-out developing – with employers keen to take advantage of favorable valuations to get pension schemes off their balance sheets for relatively little pain.
This good news is tempered by market size which is insufficient to meet suspected demand. We have yet to see the market expanded by superfunds, the only superfund to have successfully applied for authorisation is still to announce its first deal.
2022 – a bad year for pensions
Sometimes you have to right a positive blog about bad news and this is one of them. We go into 2023 hoping it will bring better news than 2022, that pensioners will get through the winter , that people’s pots will recover, that defined benefit schemes will maintain and grow their assets and their liabilities will continue to get paid.
But to suppose that we look forward to better pensions at the end of 2022 than at its beginning would be wrong. The war in Ukraine, the LDI blow up and global pressure on prices are substantial headwinds against which pensions offer limited protection.
We do at least have the comfort of knowing that state pensions payable from April 2023 will be paid to meet increases in costs of living, as will be pension credits.
There may be a brighter future but for now we must tighten our belts.