Commenting on today’s ONS Consumer Price Inflation, David Walker, Chief Investment Officer, Hymans Robertson says:

“The persistently high levels of inflation will continue to have both a shorter and longer term impact of pension funds and their investments. One of the most significant impacts has been how inflation levels have fed through to interest rate rises and expectations around future rate rises, with some significant shifts in bond yields in recent weeks. At the recent MPC meeting the vote was 6-3 in favour of a 0.25% rise with the minority voting for the 0.5% increase, evidencing the steps that may have to be taken to manage the higher inflation levels we are experiencing. The resulting rises in longer term gilt yields which we have seen over the course of 2022 will continue to have a significant impact on pensions schemes.

“The increase in medium and longer dated gilt yields could see sizeable reductions in liability values. For those DB schemes that are not fully hedged against interest rate movements, this gilt yield rise could prove a much welcome tailwind for funding and present an opportunity to reduce risk and lock in funding gains. For those with higher hedging levels and leveraged LDI solutions this could pose a different challenge, with the need to meet deleveraging capital calls and consider either selling assets to fund this or reducing hedging if some form of liquidity waterfall structure was not in place. We would urge trustees to consider whether this movement is an opportunity to take further steps towards shoring up the funding position and protecting their members benefits or reviewing the implementation of LDI solutions.”