On the go: Soaring inflation may prevent actuaries from being able to match schemes’ underlying liabilities with appropriate assets, with costs set to increase, the Institute and Faculty of Actuaries has warned.
Rising energy costs could push UK inflation up to 22 per cent next year, Goldman Sachs has warned.
Issuing a “risk alert” to its members on August 31, the IFoA cautioned that inflation may make it harder for actuaries to manage investments and hedging strategies for inflation-linked liabilities.
“There may be an enhanced risk where actuaries cannot match underlying liabilities with a suitable asset or choose to adopt ‘delta-hedging’ as an approximate matching technique,” the body said. Delta-hedging is a trading strategy that seeks to reduce risk.
“Both higher levels of inflation, and possible increased volatility, may mean that monitoring and rebalancing become expensive or problematic,” the note continued.
The IFoA urged members to consider reviewing retirement factors for deferred members to ensure they are “appropriate and consistent with preservation legislation”.
Members should also assess the need to consider any matching or mismatched exposure, along with the impact of any caps and collars on cash flows.
It said there may also be member or political pressures to ignore caps or apply discretionary increases, particularly where the cost of living is outpacing pension increases.
The likelihood of inflation causing “underpinning biting” in the future should also be considered.
“The actuarial profession is a key part of the global financial sector, which has not operated in a high-inflation environment, such as the current one, for many years,” said IFoA regulatory body chair Neil Buckley.
“We know that members will be aware of the uncertain economic environment and rapidly changing market conditions.”
