New research from technology provider PensionsFirst shows increases in inflation beyond 1.4% of market expectations would have a net positive impact on the funding positions of the pension schemes of the FTSE 100.

The research shows that inflation increases beyond 1.4% should result in improved funding levels, as caps on pension increases to members come into play but asset values continue to rise.

Assistant vice president at PensionsFirst Matthew Furniss said that inflation levels have remained below the cap levels associated with most pensions since the early 1990s, while increases in liabilities resulting from inflation have not been matched by increases in overall asset values.

“Inflation increases to-date have therefore worsened funding positions for the FTSE 100. However, given the ONS inflation figures released today showing that inflation remains above the cap for most pension increases of 5%, we are not far away from the point at which increases in inflation and inflation expectations should start to reduce rather than increase deficits,” Furniss said.

PensionsFirst chief executive Benjamin Reid said tipping points will differ for individual schemes, depending on the specific nature of both the scheme’s benefit structure and its asset portfolio.

“At a time when inflation is rising and becoming more uncertain, pension schemes can benefit from understanding their own individual risks from inflation in both the short term and longer term, and across liabilities and assets. Without this insight into scheme’s sensitivity to inflation it is difficult to make informed decisions as to the right way forward for investment strategies and de-risking activities.”

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