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The Actuary The magazine of the Institute & Faculty of Actuaries

Most UK pension schemes structurally underhedged

Only 15% of UK pension schemes have 50% or more inflation-linked assets matching their liabilities, suggesting most are structurally underhedged, research shows.

A survey of 44 UK-based actuaries working in pensions, carried out by Redington and Pension Corporation, and presented at the Actuarial Profession’s Pensions conference, also revealed the proportion of matching assets relative to liabilities in these schemes was between 25% and 35% meaning that they were, in effect, structurally underhedged.

However, it also found 75% of respondents said their schemes would likely or almost certainly carry out a buyout or buy-in in the next three years, while 80% would likely or almost certainly conduct a liability management exercise of some description.

Redington founder and co-chief executive Robert Gardner said: "The switch in statutory indexation of RPI to CPI has impacted schemes looking to de-risk, but, as the first set of our survey results show, pensions schemes can do a significant amount of first order inflation de-risking using RPI before they need to worry about the secondary order RPI/CPI basis risk."

PIC co-head of business origination Jay Shah added: "Pension schemes are continuing to take big risks of inflation eroding away investment returns and funding positions deteriorating."