UK - Interest in asset-liability matching is growing among pension fund trustees in light of the recent indexation switch from the retail prices index (RPI) to the consumer prices index (CPI), a new survey has found. 

The survey - conducted by Redington Partners and Pension Corporation - also found that the overwhelming majority of UK pension schemes are "structurally under-hedged" for inflation and "highly vulnerable" to future inflation increases.

Robert Gardner, co-founder and chief executive at Redington, said: "The switch in statutory indexation from RPI to CPI has impacted schemes looking to de-risk. 

"Taking stock of their current standpoint, pension schemes can do a significant amount of first-order inflation de-risking using RPI before they need to worry about second-order RPI/CPI basis risk."

The Bank of England expects inflation to fall sharply over the next year, with CPI forecast to drop below 2% by the end of 2012.

In the context of waning inflation, the survey said the CPI/RPI spread could "counter intuitively" become more pertinent to many schemes.

However, this general inflation risk poses a much greater risk to most pension funds than CPI/RPI basis risk, and the priority of these schemes should be to increase overall levels of inflation protection, the consultancies said.

Jay Shah, co-head of business origination at Pension Corporation, added: "Pension schemes are continuing to take a big risk of inflation eroding away investment returns, and funding positions subsequently deteriorating.

"So while it is good news de-risking is now at the top of the agenda for trustees, they should consider hedging inflation a core part of this process.

"Trustees should look at how they can best remove risk from their scheme in whatever form, even if they aren't able to insure, given current funding levels."

The survey also found that 64% of actuaries believe the schemes they advise will be likely or almost certain to carry out a buyout or buy-in within the next three years.

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