Pension scheme inflation hedging activity increased by 11 percent quarter-on-quarter to £27.5bn amid concerns over global supply chain issues, BMO Global Asset Management’s quarterly LDI survey has revealed.

The survey showed that activity in inflation was more two-way than usual, with some schemes reviewing their hedges in the context of LPI able to adjust their optimal hedging level.

BMO Global Asset Management also noted that the Pension Protection Fund's 7800 Index has shown little change in pension funding ratios, with an estimated funding position at 106.4 percent at the end of September 2021 compared to 106.0 percent at end June 2021.

However, it argued that these numbers could give a false impression of the volatility seen intra-period as a result of the market dislocations in inflation and rate expectations.

BMO Global Asset Management LDI portfolio manager, Rosa Fenwick, commented: “Concern over resurgent waves of Covid-19 faded into the background compared to two vital consequences of the recent global economic hiatus - just-in-time supply chain disruption and monetary policy normalisation.

“The scarcity of goods and labour are pushing supply-side inflation higher. This, combined with higher energy prices, can be seen viscerally by looking at the sharp rise in the market’s expectations for UK retail price index (RPI) over the coming twelve months, from 3.7 percent at end June to 5.9 per cent at the end of September.

“This has all led to more questioning of the transitory nature of the inflation.”

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