Following today’s monthly inflation figures, Clive Fortes, Partner at Hymans Robertson, commented on the impact of this new data on corporate pension schemes:
“High short-term inflation continues to be a headache for occupational pension schemes and the companies that pay for them. The average FTSE 350 company anticipated RPI and CPI in 2011 to be at rates nearly half those disclosed today. As a result of inflation remaining far above those expectations, the FTSE 350 is collectively facing an unbudgeted £4bn increase in pension liabilities.
“This unbudgeted increase in pension liabilities will be exacerbated by the current market turmoil with falling corporate bond yields driving liabilities higher. While much of the bond yield falls have been offset by falling long term inflation expectations, we expect year end FTSE 350 pension liabilities to be around £25bn higher as a result of current low bond yields. Pension schemes with significant equity holdings will fare even worse as, despite the recovery from the lows earlier in the year, equity markets remain almost 10% lower than they were at the start of the year.
“If there is one silver lining, it is that market expectations for long term inflation have fallen with today’s high short-term inflation expected to drift lower through 2012. And with market concern over longer term economic growth and European political uncertainty, long term future inflation expectations could drift even lower offering opportunities for companies to hedge their inflation risks at attractive levels. It will therefore be important for companies to take an active role in managing their pension risks if they are to capture these opportunities.”
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