Pension funds switch investments to hedge against inflation

• 83% of pension fund managers expect inflation to increase over the next 12 months
• Almost all (98%) pension fund managers believe their schemes are already well hedged against inflation, largely because they have switched investments

New research has revealed that almost six in ten (57%) pension fund managers are predicting further dramatic increases in inflation over the next 12 months. A further quarter (26%) predict a slight increase over the next 12 months.

An international study with 201 pension fund managers responsible for a collective $1.946 trillion assets under management reported that they have already taken steps to protect their schemes against inflation by increasing allocations to specific asset classes. Over half (56%) have switched investments to commodities, inflation-linked bonds (56%) and infrastructure (51%).

The action taken means almost all (98%) pension fund managers interviewed in the US, UK, Australia, Canada, the Netherlands, Switzerland and the Nordics believe their scheme is already well hedged against inflation with over half (54%) saying they are ‘very well hedged’ against this risk.

Pension fund managers say schemes are set to further change allocations in the year ahead to continue to help hedge against inflation. Over half (53%) plan to increase allocations to inflation-linked bonds while nearly half (49%) will switch to commodities and 49% to real estate investment trusts (REITs) over the next 12 months.

The table below shows the action taken by pension fund managers on asset allocation to hedge against inflation over the past 12 months and plans for the next 12 months.

Marnix Engels, Managing Director, Pension Strategy, Ortec Finance, the firm that spearheaded the study said, “It’s impressive to see how confident pension fund managers are about the impact of inflation on pension schemes over the next year, particularly as so many predict that inflation will continue its dramatic rise.

“Many schemes have already reallocated to certain asset classes in order to help inflation-proof their portfolio, and more are looking to do so in the next 12 months, as they predict future turbulence and inflation rises in the next 12 months. By modelling and mapping ahead, schemes are able to weather the storm, and overcome any short-term risks while still achieving their long-term objectives.”

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