Pensions - Articles - Deflation poses significant risk to pension schemes


  

 With UK inflation falling to a record low, actuaries at Xafinity warn that any period of deflation could pose a significant financial risk to pension schemes.

 Most UK pension schemes increase members’ pensions each year in line with inflation. Pension schemes typically look to protect themselves by investing in secure assets that also increase in value in line with inflation (e.g. index-linked Government bonds). However there is a problem with this: If inflation falls below zero the scheme’s assets will fall in value, but schemes are typically not able to reduce members’ benefits in the same way. Any period of deflation is therefore likely to increase pension scheme deficits.

 Paul Darlow, head of Proposition Development at Xafinity states: “Deflation is not just a concern for the general economy, it would also have potentially serious implications for pension schemes. Many investment strategies do not protect pension schemes against a period of deflation. We are seeing increased interest in insurance products (such as buy-in products) that do provide schemes with protection against deflation. Pricing of these products has been very attractive recently compared with an alternative investment strategy of holding Government bonds.”

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