04 May 2011

FN: Pension schemes scramble to avoid inflation

European pension schemes are buying protection against the risk of rising inflation, raising concerns that some may be over-reacting because their structure already helps shelter them from rapidly-rising price increases.

Eighty per cent of schemes are more concerned about the threat of increasing inflation than they were last year, according to the latest annual European Asset Allocation Survey published by pension scheme adviser, Mercer. Almost a third of respondents are taking immediate action to protect their assets from the risk of higher inflation. Mercer's survey shows that 38% of the funds concerned about inflation -- 30% of all respondents -- are increasing their allocation to inflation-linked bonds, inflation-sensitive assets and inflation swaps, or are establishing processes to increase their allocation to these assets as opportunities arise.

Tom Geraghty, Mercer’s head of investment consulting for Europe, the Middle East and Africa, said: “The last 12 months have been characterised by a general sense of unease and rapid swings from optimism to fear and back again. The use of loose monetary policies and quantitative easing has created the ideal environment for the re-emergence of inflation, which is a cause for worry for many pension funds." However, he warned against a wholesale surge into assets that will hedge investors against the risk of higher inflation. He said: “Protection, through acquiring inflation hedging assets, such as inflation bonds and swaps, looks expensive. Pension funds need to understand the extent to which their liabilities are affected by higher inflation: in some cases, inflation caps may mean that higher inflation is less negative for pension schemes than might be expected.”

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