‘4 per cent inflation’ to hit pensions

InflationConsumer price inflation will peak at around 4 per cent in the second half of 2017, impacting real disposable income and putting further pressure on defined benefit pension schemes, experts predict.

CPI price growth will hit 3.8 per cent in 2017, with RPI peaking at 4.3 per cent, according to a report from the National Institute of Economic and Social Research.

NIESR prediction

The findings come as Mercer’s Pension Risk Survey shows that the accounting deficit of FTSE350 DB schemes fell from £152bn at the end of September to £149bn on 31 October 2016. Mercer senior consultant Le Roy van Zyl says: “Rising inflation expectations have put a dampener on what would otherwise have been a good month for pension scheme funding levels. Despite promising signs for developed market economies, the uncertainty around Brexit for UK inflation, interest rates and growth orientated assets means that trustees and sponsors must continue their vigilance. This will particularly be the case if there is a sense that the outlook for the sponsor’s business has been adversely affected.”

NIESR head of macroeconomic modelling and forecasting Simon Kirby says: “The positive outturns for GDP growth in the near term are very welcome, but these give little to no guidance as to what will be the long run impact from leaving the EU will be. The depreciation of sterling has been the most striking feature of the post-referendum economic landscape. This will pass through into consumer prices over the coming months and quarters. By the end of 2017 we expect consumer price inflation to have reached almost 4 per cent. While we expect this to be only a temporary phenomenon, it will nonetheless weigh on the purchasing power of consumers over the next couple of years”.

Royal London Asset Management head of multi asset Trevor Greetham says: “Better than expected economic data in the UK has seen gilt yields rise back to pre-referendum levels, however rising government bond yields are not a UK-specific phenomenon.
“Bond yields have risen sharply in the US, in Europe and in the UK in recent weeks but, interestingly, inflation protected bonds have not participated in this trend (see chart below). This means bond markets are not reflecting fears of tighter monetary policy. Rather, the rise in yields is attributable to a rise in long term inflation expectations.
“The global bond sell off reflects a worldwide willingness to let inflation run higher from its current low level and this creates a positive backdrop for stocks over the medium term.”