Inflation can hamper asset-liability matching, warns IFoA – DC & Self-registration

Ready to go: Soaring inflation could prevent actuaries from being able to match underlying plan liabilities with appropriate assets, with costs set to rise, the Institute and Faculty of Actuaries have warned.

Rising energy costs could push UK inflation up to 22% next year, Goldman Sachs has warned.

In issuing a “risk alert” to its members on August 31, the IFoA warned that inflation could make it more difficult for actuaries to manage investments and strategies to hedge inflation-linked liabilities.

“There may be increased risk when actuaries cannot match the underlying liabilities with an appropriate asset or choose to adopt ‘delta hedging’ as a fuzzy matching technique,” the body said. Delta hedging is a trading strategy that aims to reduce risk.

“Higher levels of inflation and possible increased volatility may mean monitoring and rebalancing becomes costly or problematic,” the note continues.

The IFoA has urged members to consider reviewing retirement factors for deferred members to ensure they are “appropriate and in line with preservation legislation”.

Members should also assess the need to consider any matched or unmatched exposures, as well as the impact of caps and collars on cash flows.

He said there could also be pressure from members or politicians to ignore caps or apply discretionary increases, particularly when the cost of living exceeds pension increases.

The likelihood that inflation will cause an “underlying bite” in the future should also be taken into account.

“The actuarial profession is a key part of the global financial industry, which has not functioned in a high inflation environment, such as the one we are currently experiencing, for many years,” said Neil Buckley, chairman of the body. IFoA regulations.

“We know members will be mindful of the uncertain economic environment and rapidly changing market conditions.”