Inflation-linked bonds offer one way of mitigating the inflation risk in pension scheme liabilities; however, this market also provides a number of challenges. Thankfully, alternative options to protect schemes against a rise in inflation do exist.
In a recent paper, we provide analysis on these key points:
Inflation-linked bond markets have expanded
Inflation-linked outstanding issuance has quadrupled since 2005. Inflation-linked bonds in issuance amount to £235bn, with roughly £200bn in inflation-linked gilts and £35bn of corporate issuance. The liquidity on the long-end has improved.
But not enough to match pension schemes’ appetite
This should be great news for pension schemes as they establish de-risking strategies and seek matching assets. However, the inflation-linked market growth is not enough to match the inflation-linked part of the £1,200bn UK pension schemes’ liabilities. This mismatch between demand and supply is not likely to revert soon, pushing the real yield at the long-end lower.
Alternative sources of inflation-linked assets
In order to avoid this shortage of supply, pension schemes should compare index-linked gilt opportunities to other solutions available in the Liability Driven Investment space. There are often other ways to hedge inflation risk at a lower cost and still benefit from credit and illiquidity premia.
To read the full paper, click here.

[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice. Click here for full disclaimer]

Author: Robert Gardner

Robert is Co-Founder and Non Executive Director at Redington Ltd. He started his career at Deutsche Bank before joining Merrill Lynch in 2003, working as Director in their Insurance and Pensions Solutions Group. In 2008, Robert also co-founded Mallowstreet, the online pensions community which continues to grow with presence and support from the industry. Robert is passionate about the impact of social media on business believing that education, collaboration and contributions are the best way to tackle pension challenges. In January 2019, Robert joined St. James's Place Wealth Management as Director of Investments.