Deflation could have potentially serious implications for pension schemes, warns pension consultancy firm Xafinity.
According to the Bank of England's (BoE) latest inflation report, consumer price index (CPI) inflation fell to 0.5% in December 2014, which was below a 2% target. BoE governor Mark Carney predicted inflation would likely fall further, and potentially "turn negative" in spring, and "be close to zero for the remainder of the year".
Xafinity warned deflation represents a "significant financial risk" because the value of secure assets invested from pension schemes was tied to inflation. The firm said if inflation fell below zero, the scheme assets would fall in value. Since schemes would not able to reduce members' benefits in the same way, deflation would be likely to increase pension scheme deficits.
Paul Darlow, head of proposition development at Xafinity said: "Deflation is not just a concern for the general economy, it would also have potentially serious implications for pension schemes. Many investment strategies do not protect pension schemes against a period of deflation."
Carney explained the fall of inflation was mainly due to the steep drop of oil prices during the second half of 2014 but said he expected inflation to return to its 2% target within two years.