Defined benefit (DB) pension trustees should take steps to prepare for the consequences of high inflation, including reviewing investment strategies and member communications, Atkin Pensions has said.

In the context of CPI reaching 9.4 per cent in June 2022, Atkin urged DB schemes to obtain an up-to-date funding position and review whether their long-term funding strategy remains appropriate, as the increases in long-term gilt yields "are equivalent" to a fall in the value of a typical scheme’s liabilities of around 25 per cent.

The company also urged schemes to consider whether they have sufficient liquid assets available to meet collateral calls caused by significant increases in long-term interest rates, as LDI managers seek to recapitalise the funds to maintain the level of hedging, which can take place at short notice.

Atkin also suggested that schemes may want to review their overall strategy and noted that meeting these collateral payments may require growth assets to be surrendered, which could impact on the overall return target.

It warned that, due to the significant market movements, the effectiveness of hedging could deteriorate quickly and become much less effective, and trustees should therefore review whether their level of hedging remained appropriate.

"There could also be scope to increase your level of hedging as high long-term interest rates have reduced the cost of obtaining this type of protection," the firm noted.

The company also advised that schemes should assess any impact on their employer covenant from the current environment, in particular increased borrowing costs, high inflation and energy prices may all push up costs, with the employer then having limited ability to pass these onto customers in response.

In response to members taking early retirement, schemes may want to discuss with their advisers whether it is appropriate to make an adjustment to the current factors and/or highlight the different between revelation and pension increases in the information they provide to members, Atkin added.

The company also advised on member communications, stating that schemes can expect to receive an increase in member queries as to how the current market volatility and high impacts on their benefits, which could result in increased queries and possible complaints as well as, potentially, calls to apply discretionary increases.

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