Investment - Articles - Rise in inflation and the impact on pension schemes


Celene Lee, Principal and Senior Investment Consultant at Buck comments on news that UK inflation rose to 4.2%,and what impact this will have for pension schemes.

 “In the UK, inflation has been relatively subdued for at least the last 25 years, meaning many scheme trustees haven’t had to watch too closely how accurately their investments are hedged against rising inflation and therefore increasing liabilities.
 
 “Because most pension schemes have a long time horizon, surges in inflation particularly over cumulative years can have a very significant impact, though those that have implemented higher inflation hedging levels are generally better protected. If high levels of inflation are sustained, then pension schemes need to consider how they can make changes to their investment strategy, such as diversifying assets, to protect themselves and maximise returns. In times of high inflation, for example, fixed interest bonds are less attractive. The accuracy of inflation hedging also becomes much more important when the magnitude of inflation is high.
 
 “For DC scheme members, the major risk of inflation is the erosion of the purchasing power of your final pot, so it is extremely important to consider how to protect this from the impact of inflation. Contributing a percentage of your salary rather than a fixed amount or a one-off contribution can help combat inflation in pension fund savings. This means pension contributions will increase in line with salary growth which will likely be higher than inflation over the full course of your career.”
 
 “The Bank of England is likely to be under pressure to raise interest rates to combat inflation. However, it is a conundrum as the current inflationary environment has largely been driven by higher cost of production, transport and energy. Raising interest rates may potentially have little impact on inflation, but will for sure increase household cost on mortgages at a time when hard-working families are already facing higher bills. This could dampen the economic activity without combating inflation.”
   

Back to Index


Similar News to this Story

PMI appoints Cardano as Covenant Insight Partner
The Pensions Management Institute (PMI) announces today that it has appointed Cardano Advisory as its newest Insight Partner, offering specialist supp
Rise in inflation and the impact on pension schemes
Celene Lee, Principal and Senior Investment Consultant at Buck comments on news that UK inflation rose to 4.2%,and what impact this will have for pens
Legal and General announce buy in with Reuters
Legal & General Assurance Society Limited (“Legal & General”) today announces that it has agreed a c£310 million full-scheme buy-in transaction with t

Site Search

Exact   Any  

Latest Actuarial Jobs

Actuarial Login

Email
Password
 Jobseeker    Client
Reminder Logon

APA Sponsors

Actuarial Jobs & News Feeds

Jobs RSS News RSS

WikiActuary

Be the first to contribute to our definitive actuarial reference forum. Built by actuaries for actuaries.