On the go: Some £450bn of inflation-linked liabilities belonging to defined benefit schemes remains unmatched due to a shortage of long-dated gilts, according to analysis by Alpha Real Capital.
Approximately £1.5tn of private sector DB pensions’ total £2.2tn of liabilities is index-linked, but there are only around £800bn of index-linked gilts, creating a shortfall of around £700bn, the asset manager found.
It added, however, that because many schemes use liability-driven investment techniques, the portion of index-linked liabilities is around 70 per cent, or £1.05tn, leaving a shortfall of around £450bn of unmatched inflation-linked liabilities.
Alpha Real Capital argued that this shortfall could grow because of heightened fears around inflation, and schemes moving towards their endgame faster than expected. Its analysis showed 70 per cent of UK pension schemes see a moderate or high risk that higher levels of inflation may persist, defying those who have insisted for some time that it is a transitory phenomenon.
More than half of the professional pension investors studied said they planned to increase their level of inflation hedging.
“Funding levels have fared well and, in many cases, actually improved through the pandemic as a result of the strong performance of risk assets. This means that pension funds not only want to derisk but many more can afford to do so, which means demand for inflation-linked assets remains high,” it explained.
“The certainty given by the recent [retail price index] reform announcements on the future of the RPI measure is another factor catalysing some pent‐up demand for inflation‐linked assets.”
Alpha Real Capital’s analysis revealed a shortage of long-dated, index-linked gilts available for DB schemes to match their longer-term liabilities.
It found that out of 31 index-linked gilts, only 14 have a maturity of more than 20 years and only three have a maturity of more than 40 years, representing just 14 per cent of the total market value of index-linked gilts.
“While the absolute levels of index‐linked gilts issuance have been high at an average of around £30bn a year since the financial crisis, the proportion of total issuance that is index‐linked has fallen dramatically, from a high of 25 per cent to as low as 5 per cent more recently,” it added.
