Xafinity Corporate Solutions waned against rising inflation stating that workplace pension schemes are at the mercy of indexes and sponsors should take preventive measures to mitigate risk.
“Whether we like it or not, corporate balance sheets hang on a snapshot of corporate bond yields and the outlook for price inflation. Neither has been stable yet each has managed to keep the other in check throughout 2011. This is not something sponsors can count on, as history has shown us,” said Hugh Creasy, director of Xafinity.
The UK sponsors have been lucky so far this year as some areas of the market have firmed up while other areas slipped. With corporate pension liability pegged at £1.4 trillion, the sponsors have been fortunate thus far, observed Mr. Creasy.
Terming the present calm as illusory, Mr. Creasy said though sponsors have taken widespread measures to reduce equity exposure and de-risk their schemes, much less efforts have gone into protecting funds against inflation.
A small shift of 25 basis points in inflation will push the deficit up by £70 billion, a Xafinity model showed. This is equivalent to a 700 points drop in the FTSE index.
“While we cannot be so blase as to dismiss such a fall in equity prices, a 0.25 per cent shift in the outlook for price inflation is not at all unusual,” said Mr. Creasy, adding “The mantra that protection is too expensive has been persuasive for many, but those sponsors are riding on the hope that inflation will stay under control.”
Alistair Cunningham, director of Wingate Financial Planning agreed, saying shifting to CPI from RPI will some of the inflation pressure. “The biggest single thing that will affect schemes is capping inflation and moving to using the consumer price index, which puts a finite limit on the deficit and takes the pressure off,” he said.