On the go:Defined benefit schemes were hit by a £46bn spike in liabilities in September due to the fall in net interest rates, following the biggest hike in consumer prices since 1997 in August, according to analysis from XPS Pensions Group.
August marked the highest surge in inflation since records began in 1997, and pensions experts have warned schemes could be faced with significant challenges should the phenomena prove persistent, as opposed to transitory.
Last month, inflation rose to 3.2 per cent from 2 per cent in July, according to figures from the Office for National Statistics, beating out central bank optimism that cited expectations of a 2.9 per cent increase.
Depending on the extent to which individual schemes have hedged inflation, and how their benefits are linked to it, persistent consumer price spikes could present real challenges for schemes.
In an inflationary environment, the value of certain pension scheme investments such as fixed income bonds can be eroded.
Analysis from XPS Pensions Group published on Tuesday revealed the fall in net interest rates will have added around £46bn in liabilities to UK pension schemes between September 1 and September 15.
The consultancy stated that the impact of the inflation hike on individual schemes “will vary considerably across the market, as highly hedged schemes will be largely protected, with significant worsening in funding for schemes with limited inflation protection”.
With many pension schemes in an improved situation from the recent strong growth in market performance, it may be a sensible time to review the inflation exposure in place, XPS suggested.
According to Felix Currell, senior consultant at XPS Pensions Group: “The speed of the recovery of the supply side of the global economy and the impact of further stimulus in the US will be key factors in the ongoing performance of equity markets.”
He added: “Pension schemes will be concerned about the ability of markets to keep pace if inflation reaches very high levels, particularly if interest rates are raised early to combat prevailing inflationary fears.
“Real assets with contractual inflation linkage may therefore prove to be an attractive option for schemes concerned about these negative effects on their growth portfolio.”
