UK prices1 rose by 3.2% over the year to 31 August 2021, representing the highest annual increase in prices since 2012. For pension schemes, an additional concern is that the long-term inflation expectations are also rising, leading to increasing member benefits and pension liabilities. XPS’s DB:UK Funding Tracker estimates that the resulting fall in net interest rates will have added around £46bn in liabilities to UK pension schemes over the short period from 1 September to 15 September 2021.
The impact 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 recent strong growth market performance, it may be a sensible time to review the inflation exposure in place. The impact of rising inflation on growth assets is more unclear.
Felix Currell, Senior Consultant, XPS Pensions Group said “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. 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.”
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