The National Association of Pension Funds (NAPF) has called for immediate action in three areas to help defined benefit (DB) workplace pension schemes and their sponsors navigate the DB transition as smoothly as possible.
A new report: ‘DB run-off: The demand for inflation-linked assets’, explains that as DB schemes mature there is likely to be a continuing increase in liability hedging among DB schemes and also highlights the gap between supply and demand of index-linked gilts.
The concern is that if schemes are unable to access the assets they need to adequately meet their cash flows and hedge their liabilities, this is likely to expose scheme sponsors to increases in deficit volatility and put more pressure on them to support funding levels.
The NAPF has identified three areas that require action to help pension schemes:
• Increased issuance of index-linked gilts
• Better availability of alternative inflation-matching assets
• Development of a framework that allows for more flexible models of DB pensions provision
Graham Vidler, director of external affairs, NAPF, says: “Defined benefit schemes are currently struggling to access a sufficient supply of the types of assets they need as their scheme matures.
“If, in order to reduce volatility, schemes are forced buyers of liability matching assets with low or negative real yields, sponsors will be called upon to fill any shortfall that can no longer be met through scheme investments. Unless the supply of assets is addressed, and quickly, the costs of providing member benefits could continue to rise and place even greater pressure on scheme sponsors.
“There is no quick fix solution to the problem of securing member benefits in a market fundamentally lacking in the assets appropriate to guarantee those benefits are paid, but the report launched today proposes three courses of immediate action to help pension schemes manage this transition as smoothly as possible.”
