National Association of Pension Funds called for increased issuance of index-linked gilts by the government, better availability of alternative inflation-matching assets and a framework for more flexible defined benefit provisions when it comes to requirements of these plans as sponsors grapple with derisking their funds.
In a report, published Tuesday, the NAPF said these three actions are needed to the help workplace pension funds and their sponsors derisk.
“Index-linked gilts have become too expensive for schemes,” said Ruth Meade, senior researcher at the NAPF, at a conference held Tuesday in the trade body's offices in London. Ms. Meade said pension fund executives feel they are “forced buyers” of index-linked gilts and are “increasingly looking for alternatives … that are better value investments.”
Projections by the NAPF show that the demand for index-linked gilts, according to current planned issuance, is set to outstrip supply from pension funds until 2038. Ms. Meade called for increased issuance, “providing it can be done without impeding the smooth functioning of the gilt markets.”
Ms. Meade said pension fund executives are looking for alternative sources of inflation-linked assets, such as commercial real estate and infrastructure, and need these investments to be better available before they can invest. There is limited supply of social housing, ground rent and the corporate inflation-linked market, said the report.
She said in order to fully hedge pension fund liabilities, executives would need access to an inflation-linked market of about £1 trillion ($1.7 trillion).
Ms. Meade said there is also limited transparency, and high investment fees. “The attributes (of these inflation-linked assets) are attractive,” but the high investment fees keep pension funds from investing in them.
Ms. Meade said the NAPF is calling on the “industry and government to ensure (these assets are marketed to their) full potential,” and for pricing and valuations that are “transparent and can be relied on.”