High inflation continues to put stress on pension scheme investments

  • CPI this morning reached 9.1%, as inflationary pressures push prices higher, continuing the trend over the last few months.
  • Analysis from XPS Pensions Group’s DB:UK Funding Watch shows that inflation expectations have surprisingly reduced UK defined benefit long-term liabilities by around 0.2% over the last twelve months, as longer-term inflation expectations have remained fairly stable.
  • Instead, it is short-term inflation that has shown steep increases, with the Bank of England estimating that annual CPI could reach 11% later this year.
  • This provides members with higher yearly benefit increases, putting stress on liability hedging strategies used to protect schemes against such movements.
  • In addition, short-term inflation puts pressure on return-seeking assets to at least maintain their value as prices are eroded in real terms; the S&P 500 has dropped into bear market territory as markets continued to be volatile.
  • In the face of rising interest rates, growth stocks began to look increasingly overpriced this quarter and a natural rotation into value stocks (prepared much better to weather the rising inflation) occurred.

Felix Currell, Senior Investment Consultant at XPS Pensions Group, said: “Against a backdrop of rising prices and tightening real wages, it is a tough time for schemes looking to invest, with the World Bank predicting a worldwide economic contraction. At the same time, with rates significantly behind inflation levels, ‘safe’ assets are also of limited appeal.

“We have historically seen long-term equity investors rewarded for riding-out bear markets but would recommend that clients seek advice on how their investments can be structured to best manage their objectives.”