UK - Towers Watson’s European head of investment has warned of the risk of an “inflationary default” on UK government debt.

Speaking at the National Association of Pension Funds Investment Conference in Edinburgh, Chris Ford sounded a note of caution on UK debt levels, pointing out that it was four times larger than the country’s GDP.

“It’s pretty widely accepted that not all of those obligations are going to get met,” he said. “There are going to be some defaults, either actual defaults or inflationary defaults by printing money. One of those two things is almost certainly going to happen.”

He went on to say that including private pension obligations - as well as funded and unfunded public pension obligations - left the country with an additional amount of debt about the size of GDP.

“One times GDP worth of pensions debt?” he said. “And we’ve got four times GDP generic debt out there in the market as well - if you apply the thesis that not all of it is going to get paid, then not all of the pension debt is going to get paid either, which means not all the benefits will get paid.”

Ford said the industry knew this was true, as it had already happened, explaining the switch from the retail prices index to the traditionally lower consumer prices index was a “default in the soft sense”

He also argued that any fund transfer into the Pension Protection Fund resulted in a benefit cut, adding that there would soon be a competition for total return assets as schemes sought to grow.

Tim Gardener of Axa Investment Managers shared Ford’s concerns, arguing that inflation was “already embedded in the system”.

The company’s global head of consultant relations said inflation would be an “easier, more comfortable way” of addressing the rising debt levels.

“I’m certain - perhaps certain is too strong a word - I’m certainly [aware] that inflation is there,” he added.

“The level of inflation doesn’t matter - 5% would be good, 20% wouldn’t be quite so much fun.”