IPE survey shows pension funds expecting low inflation
EUROPE - The majority of European pension funds are expecting low inflation over the next year and a half, according to a recent IPE survey.
Nearly 70% of respondents said inflation was unlikely to exceed 3% over the next 12-18 months.
A further 17% felt that, while inflation would be higher than 3% in the medium term, it would remain under control.
Only 5% said inflation would be higher than 5% in the medium term, while just 2% thought deflation was likely.
A Dutch pension fund said: "Currently, [we] do not see inflationary pressures to justify high inflation expectations. Furthermore, the European Central Bank's monetary policy will be tilted to be more restrictive if and when an inflationary environment is anticipated."
A Danish fund added: "Economies are recovering slowly and at present only working at 70-75% of total production capacity."
More than three-quarters of pension funds said their board or investment committees had discussed the issue of inflation this year.
More than 68% of respondents said they had considered inflation-linked bonds to be the asset class best suited to provide funds with inflation protection.
This was followed by inflation swaps or swaptions (46.5%), real estate (44%) and equities (39%).
More than 97% said they had seen their pension fund make a dedicated allocation to equities, while 75.5% had to real estate, 57% to inflation-linked bonds and just 15% to inflation swaps or swaptions.
However, of the 85% not currently using swaps or swaptions, almost half (45%) said they would consider them in the future.
The average fund allocation overall to inflation-linked assets, excluding equities, was 14%.
A quarter of respondents had a 0% allocation, while the highest individual allocation was 90%.
The survey results were based on the responses of 41 European pension funds, with combined total assets of €152.6bn.