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

“The update from the ONS today follows on from the Bank of England announcement earlier this month and reiterates that this is a period of rapid change for 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. The rise in longer term gilt yields, which we have seen over the course of 2022, will continue to have a significant impact on pensions schemes, leading to a worrying time for pensioners. Against a backdrop of inflation, and a soaring cost of living crisis looming, an improvement in funding could become less positive as rates continue to rise. We would urge Trustees to review the resilience of their strategies to these interest rate and inflation moves and in particular consider how inflation may feed through to day to day net cashflow requirements.

“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, gilt yield rises 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.”