Junly 2012_issue_14
Year-on-year RPI – the indexation measure most pension schemes use to increase pension payments and revaluations – has been volatile in comparison with 10 and 30-year infl ation swaps, which represent the market’s expectation of infl ation. Investors looking at the longterm infl ation picture need to consider the risk this will pose to their portfolios from a liability perspective because on the nominal side rates are at all time lows but infl ation expectations have not come down nearly as far and have not been volatile. On that basis, it is logical to protect against infl ation even though rates have come down massively because the swap curve shows a level of infl ation that is painful for defi ned benefi t pension schemes. The question for schemes is where they can get best value in this environment – through physical bonds i.e. index-linked or infl ation swaps?
Comments