DB pension administrators asked to prepare for consequences of high inflation
Defined benefit (DB) pension trustees should take steps to prepare for the impact of high inflation, including reviewing investment strategies and member communications, Atkin Pensions said.
In connection with the CPI hitting 9.4 percent in June 2022, Atkin urged DB systems to obtain an updated funding position and to consider whether their long-term funding strategy remains appropriate in light of rising long-term Gilt yields “corresponds to a decline in value.” of the liabilities of a typical system of about 25 percent.
The company also urged schemes to assess whether they have sufficient cash to meet collateral demands caused by a significant rise in long-term interest rates as LDI managers seek to recapitalize funds to meet hedging levels to maintain what may be done in the short term note.
Atkin also suggested that schemes should review their overall strategy, noting that meeting those security payments may require the return of growth assets, which could impact the overall return objective.
It warned that hedging effectiveness could deteriorate rapidly and become much less effective due to the significant market movements, and trustees should therefore review whether their level of hedging remains appropriate.
“There might also be scope to increase your level of protection, as high long-term interest rates have lowered the cost of obtaining this type of protection,” the company noted.
The company also advised that schemes should assess any impact of the current environment on their employer agreement, notably increased borrowing costs, high inflation and energy prices can drive up costs with limited ability for the employer to mitigate in response to to pass on to customers.
In response to members taking early retirement, schemes may wish to discuss with their advisers the appropriateness of adjusting for current factors and/or highlighting the difference between disclosure and pension increases in the information they provide Make available to members, Atkin added.
The company also advised on member communications, explaining that the systems can anticipate an increase in member requests, how current market volatility and high impact are affecting their services, which could lead to increased requests and possible complaints, and potentially calls to apply discretionary increases.