Recent market turbulence has negatively impacted many pension schemes. However, according to Robert Gardner, Co-CEO of Redington, the independent consultancy firm that advises pension funds and insurance companies, the sharp move in long-dated break-even inflation may offer an opportunity for pension schemes looking to further de-risk some of their inflation exposure.
“The sharp fall in UK breakeven inflation offers schemes with flexible Liability Driven Investment (LDI) and dynamic de-risking mandates an opportunity to increase their inflation hedge ratios.”
Gardner notes, “this should only be done where there is a clear Pension Risk Management Framework in place along with the appropriate governance and implementation framework”.
“30 year UK breakeven inflation (BEI) as implied by 30 year inflation linked gilts is trading at 3.40%. It reached a low of 3.35%, a fall of 30 basis points in the past three weeks.”
Gardner cautions that “Previous sharp falls in breakeven inflation rates have been short-lived, lasting for days rather than months as demonstrated by the table below.”
Trustees who have set in place a robust game plan before market turbulence arises are best placed to take advantage of any opportunities that may arise. For example, being able to hedge inflation risk at below 3.50%, a key level for many pension schemes.”
Historical Market Examples
|
Event
|
Date of Low
|
Event Duration
|
Time to Rebound 25 Basis Points from Low
|
|
30yr BEI Below 3%
|
8 December 2008 (2.805%)
|
6 Trading Days
|
21 Trading Days
|
|
30ry BEI Below 3%
|
12 March 2009 (2.775%)
|
10 Trading Days
|
14 Trading Days
|
Source: Bloomberg / Redington
|
