Post-covid inflation and the decline of UK defined benefit pension schemes

Since their inception as far back as the 17th century, UK occupational pension schemes have had a long and complex, yet fascinating, history (Rhodes, 2021). Reacting to social, economic, regulatory and demographic changes alike, they have over time been a representation of the ever-developing modern world. Defined benefit (DB) schemes had been at the forefront of the industry and grew substantially in the UK during the postwar period, providing retirees with a guaranteed income for the rest of their life. However, in recent years their popularity among occupational pension providers, employers, has declined. Many schemes have been closed to new members, while few are being created. Overall, the “universe” of DB schemes is shrinking with time. While many factors can be credited for the fall in DB scheme membership, the first objective of this paper is to outline some of the chief causes: the introduction of defined contribution schemes, longevity improvements and recent expansionary monetary policy. The liabilities of DB schemes that remain open are exposed to the risks described in this paper, as well as other emerging issues. Inflation in the post-covid economy has been severe, reaching the highest level in over 30 years in the UK. Furthermore, it is uncertain how long it may remain. Hence, this paper also seeks to investigate the potential impact of this topical economic issue on DB scheme liabilities, which are loosely pegged to price level increases in the UK through revaluation in deferment and in-payment increases. Namely, the effect of persistent high inflation on liabilities throughout the life of a DB scheme will be modelled through sensitivity analysis on the inflation assumptions within a dummy-scheme actuarial valuation. The results show that inflation is a key determining factor of liability levels over the lifetime of the dummy scheme, emphasising its importance to DB pension decision makers in the UK.