Defined benefit (DB) pension schemes' liabilities are estimated to have increased by around £46bn between 1 September to 15 September 2021 due to a fall in net interest rates, according to XPS’s DB:UK Funding Tracker.

XPS noted that UK inflation has risen by 3.2 per cent over the year to 31 August 2021, the highest annual increase in prices since 2012, with pension schemes facing the additional concern that the long-term inflation expectations are also rising, potentially leading to increased member benefits and liabilities.

It acknowledged, however, that the impact on individual schemes will vary “considerably” as highly hedged schemes will be largely protected, while schemes with limited inflation protection may see significant worsening in funding.

Considering this, XPS suggested that with many pension schemes in an improved situation from recent strong growth market performance, it may be a sensible time to review the inflation exposure in place, warning that the impact of rising inflation on growth assets is "more unclear".

XPS Pensions Group senior consultant, Felix Currell, commented: “The speed of the recovery of the supply-side of the global economy and the impact of further stimulus in the US will be key factors in the ongoing performance of equity markets.

“Pension schemes will be concerned about the ability of markets to keep pace if inflation reaches very high levels, particularly if interest rates are raised early to combat prevailing inflationary fears.

“Real assets with contractual inflation linkage may therefore prove to be an attractive option for schemes concerned about these negative effects on their growth portfolio.”

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