Over recent months as inflation has soared, we have seen many people, both pre-retirement and in retirement, struggle with the sharp rise in prices for essential goods and services. The inflation forecasts provided by the Bank of England suggest this will certainly continue into 2023.
With high inflation so prominent, we have been asked by many trustees and their advisers as to what impact we have seen in current PIE projects relating to engagement and take up. Interestingly, we have not seen any material change in either engagement rates or acceptance rates during this period. However it is not quite as simple as that.
What’s been our experience with pensioner members?
From our experience working with members in retirement, we know that they are far better at budgeting than those pre-retirement. Pensioner members have reminded us that they have lived through periods of high inflation during their working lives and have stronger memories of budgeting through those difficult times. We also find that pensioner members have built in a cushion in their budgeting to cope with the fear of rising costs or unexpected expenditure. Many therefore have planning already in place for inflationary prise increases. However this is not the case for everyone.
We have undoubtedly spent more time discussing inflation with pensioner members, many of whom have been forced to make cuts to their day to day spending, or have dipped into their savings to maintain their standard of living. For some members however, where total pension income together with the income from other assets far exceeds their monthly budgetary requirements, inflation is seen as a far less important aspect of their financial planning.
In all PIE projects a key part of our discussion with the member is their understanding of the offer being made to them. It is usually the case that members don’t understand the different elements of their pension and of those, which are exchangeable and which are non-exchangeable. Many don’t realise that taking the PIE offer rarely means giving up all of their future increases, as it typically only relates to increases on part of their scheme pension.
In addition, many pension schemes have some benefits that receive fixed increases, or where increases are capped. After discussions with an adviser, members become more aware that 13% rates of inflation are unlikely to translate into similar increases in their scheme pension.
With one recent PIE project we saw a spike in engagement at the end of the offer window, which we believe was driven by enhanced media coverage of inflation. The cost of living crisis has put an immediate focus by pensioners on their income in the short term; put simply, some need more money now. While they may not be able afford the loss of inflationary increases over the long term, taking a PIE offer can give immediate relief and put off potentially less palatable options such as downsizing, equity release or cutting their spending even closer to the bone.
Origen’s view
An important part of the advice journey is to ensure that pensioner members understand the impact of a short term decision versus a potential longer term outcome. Pensioner understanding of cross over and breakeven points is vital.
It is imperative that pensioner members consider the impact of inflation as part of the decision making process. This should cover both essential and discretionary spending, as well as the inflation proofing of other retirement income. We have provided ongoing training to our advisers on the current high inflationary environment and have detailed discussions with pensioner members as part of their PIE advice meetings to ensure they understand the options available and can make fully informed decisions.
CA8478 Exp 08/23
[ Date Posted: 30/08/2022 13:30:47 ]
