RiskFirst research shows that an increase in inflation of 1.4% above current market levels would have a net positive impact on the funding positions of the pension schemes of the FTSE 100

According to new research by technology provider RiskFirst, further increases in inflation may actually prove beneficial to FTSE 100 pension schemes. The research suggests that increases in inflation are costly for FTSE 100 schemes only up to a level of, on average, 1.4% above the current market rate. Inflation increases beyond this level – the so-called “tipping point” – should result in improved funding levels, as caps on pension increases to members come into play.

Office of National Statistics (ONS) figures released today show the Retail Price Index (RPI) inflation figure will hold at 4.5%, but predict it will rise to 5.0% later in the year.. “Since the early 1990s inflation levels have remained below the cap levels associated with most pensions and increases in liabilities as a result of higher inflation have not been matched by increases in overall asset values,” says Matthew Furniss, an Assistant Vice President at RiskFirst. “Inflation increases to date have therefore worsened funding positions for the FTSE 100. However, given the ONS inflation figures released today, we are not far away from the point at which inflation increases should start to reduce rather than increase deficits.”

Benjamin Reid, CEO of RiskFirst Analytics adds: “Individual schemes’ tipping points will differ depending upon the specific nature of both the scheme’s benefit structure and its asset portfolio. At a time when inflation is rising and becoming more uncertain, pension schemes can benefit from understanding their own individual risks from inflation in both the short term and longer term, and across liabilities and assets. Without this insight into scheme’s sensitivity to inflation it is difficult to make informed analysis as to the right way forward for investment strategies and de-risking activities.”