Rising inflation to add £56bn to liabilities

Soaring inflation expectations will pile an estimated £56 billion to value of liabilities of aggregated schemes of FTSE100, according to Redington Partners.

The firm said that the recent rise above 4 per cent in long term inflation expectations will have serious repercussions for defined benefit pension schemes.

In the past year, long term inflation expectations have increased by around 0.70 per cent. Redington estimates that this increase has added approximately £56 billion to the value of the liabilities of the aggregated pension schemes of the FTSE100.

Redington argues that long term interest rates are failing to keep up with the sustained rise in inflation expectations putting pressure on schemes’ funding.

Dawid Konotey-Ahulu, Partner and Co-Principal at Redington Partners, says: “Pension schemes that fail to address the insidious slow burn of rising inflation are rolling a loaded die. These inflation expectation levels may be a temporary aberration but fundamentals as well as technical signals look ominous. Systemic demand for inflation linked assets continues to outstrip supply, and assumptions that these high levels can’t or won’t last may turn out to be heroic. FTSE 100 pension schemes in aggregate are seeing serious real deteriorations in their levels of funding. Each 0.01 per cent increase adds around £820 million to FTSE 100 liabilities.”