High inflation expectations have “surprisingly” led to UK defined benefit (DB) schemes seeing their long-term liabilities fall by around 0.2 per cent over the past 12 months, although the backdrop of rising prices and tightening real wages have resulted in a “tough time” for schemes looking to invest, according to XPS Pensions Group.

The latest CPI inflation data, published this morning (22 June), showed that inflation has increased to 9.1 per cent, continuing the trend of rising inflation seen over the past few months.

While longer-term inflation expectations have remained fairly stable, short-term inflation has shown “steep increases”, with the Bank of England estimating that annual CPI could reach 11 per cent later this year.

XPS noted that this provides DB scheme members with higher yearly benefit increases, putting pressure on liability hedging strategies used to protect schemes against such movements.

Furthermore, short-term inflation puts stress on return-seeking assets to at least maintain their value as prices are eroded in real terms.

XPS added that, in the face of rising interest rates, growth stocks began to look increasingly overpriced this quarter and a natural rotation to value stocks took place.

“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,” commented XPS Pensions Group senior investment consultant, Felix Currell.

“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.”

Share Story: