Urgent action is needed to help defined benefit schemes and their sponsors manage smoothly their shift towards a de-risked portfolio, the National Association of Pension Funds said today.
Its report, DB run-off: the demand for inflation-linked assets, explained that as DB schemes mature there is likely to be a continuing increase in liability hedging. The report also highlighted the gap between supply and demand of index-linked gilts.
The association said if schemes were unable to access the assets they needed to adequately meet their cash flows and hedge their liabilities, this would likely expose scheme sponsors to increases in deficit volatility and put more pressure on them to support funding levels.
Graham Vidler, NAPF director of external affairs, added: '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.'
NAPF is therefore calling for immediate action in three areas to help pension schemes navigate this transition.
These include an increased issuance of index-linked gilts, better availability of alternative inflation-matching assets and the development of a framework that allows for more flexible models of DB pensions provision.
Vidler continued: '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.'