The Pensions Policy Institute (PPI) has said that high inflation could act as catalyst for defined contribution (DC) schemes to reassess their investment strategies, urging them to consider introducing greater protection against inflation in their portfolios.

Lauren Wilkinson, senior policy researcher at the PPI, said: “While the long-term nature of DC investment means that decision makers need to be pragmatic when making changes to investment strategy, if high levels of inflation are sustained, they may need to consider steps that can be taken to introduce greater inflation protection into their portfolios.”

She added: “This is unlikely to mean large-scale, rapid changes to investment strategy – especially considering the costs associated with making portfolio changes and the unpredictable nature of the current landscape. However, given that inflation has now risen to its highest level in 40 years, investors may want to reassess whether their strategy is suitable if inflation remains elevated going forward.”

Wilkinson noted there is an opportunity for those DC schemes that are open to exploring a more diversified approach, to get to know their investments in more detail. “Any changes to investment strategy need to be approached pragmatically, recognising the long investment horizons and full range of risks faced by the scheme, in order to protect member outcomes”, she added.

Since the UK last experienced such high levels of inflation in the 1970s and 1980s, there has been a growth in accessible alternative classes that can potentially offer natural, implicit or explicit inflation protection, which may not have been fully explored due to the persistently low levels of inflation experienced up until recently Wilkinson explained.

Lauren Wilkinson at PPI

Lauren Wilkinson, PPI

The PPI’s The DC Future Book – published today in association with Columbia Threadneedle Investments – provides a detailed source of longitudinal analysis across the DC landscape, by which the implications of existing policy can be monitored, and in order to provide a solid evidence base for future innovation.

As well as analysis of key trends, some positive (continued growth in workplace pension participation and average DC pot sizes) and others less so (ongoing volatility in the way DC savers are accessing their pots and an emerging trend towards lower use of advice), this year’s book highlights the need for DC schemes to build greater resilience in order to respond to unexpected challenges that may disrupt existing trends.

The report explores the ways in which current high levels of inflation may impact DC investment strategies across a range of asset classes, and how investment decision makers may respond to this challenge.

Andrew Brown, client relationship director at Columbia Threadneedle Investments, said: “The last 12 months have seen extraordinary challenges. Between the ongoing effects of the COVID-19 pandemic, the war in Ukraine and additional supply chain constraints, inflation in the UK has reached its highest level in 40 years.”

Against this background, he said, DC pension funds should be encouraged to consider inflation protection within members’ default funds. Less liquid real assets such as property and infrastructure can form part of a portfolio to manage this risk but are currently underutilised within DC investment strategies, he added.

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