Rising inflation could raise concerns for pension scheme investments and corporate sponsors, as well as potentially tempting more savers to transfer out their savings, Pictet Asset Management head of multi asset London, Andrew Cole has suggested.
Speaking at the Pensions Age Northern Conference 2022, Cole said that a period of high inflation where pension incomes are capped could see more savers tempted into alternative investments, particularly if their income isn’t keeping up with their cost of living.
“I think there is a bigger problem ahead,” he continued. “That backdrop for scammers offering higher rates of return because pensioners are suffering amid the cost of living crisis is actually going to worsen, and I think the regulator is going to have a problem there.”
Rising inflation could also impact corporate sponsors, according to Cole, who warned that “corporates are suffering”.
“There is a squeeze on their profitability because of inflation, and that will become clear in thinking about those covenants, whether they be private or public companies.” he said.
Cole also suggested that pension scheme trustees may need to be a bit more acute in where their asset allocation is at any moment in time, as inflation, on average, is going to be higher than the market has experienced the past 20 years.
“It’s a very different environment that we’ve experienced as investors over the past 12 months to what we’ve seen on average for the previous 25,” he explained.
Furthermore, whilst Cole clarified that inflation is unlikely to reach 1970s levels, he acknowledged that here are “a lot of uncertainties” around the future levels, particularly in light of how wrong previous forecasts have been.
He stated: “When you look at what investors and central banks thought the inflation rate today was going to be a year ago, they have never been more wrong. That doesn’t fill me with any confidence when I look at their expectations for the next 12 months.
“I think there’s a huge uncertainty about what the inflation rate is going to be 12 months forward, 24 months, five years, and then a huge amount of policy uncertainty in terms of what the central banks do.”
Cole suggested that this will mean investors may require an extra bit of return, and markets may need to be a bit cheaper to grab investor interest.
In addition to this, Cole noted that whilst the regulatory environment for pension scheme investments has been focused on de-risking for some time, this is “increasingly challenged” by recent market conditions.
“The regulatory environment and government, I think, will direct pensions to invest in their plans and their schemes, irrespective of the return,” he added, highlighting this as “another form of financial repression”, as the government looks to de-leverage its balance sheet.