Inflation, Pensions and Liability-Driven Investment Solutions

Markus Aakko

Pension plans play a significant role in most developed market societies. As investments, they provide capital to the economy; as funded pools of savings, they provide security to millions of retirees. Changing demographics have put the solvency of several pension schemes to the test, as ageing societies mean more retirees and fewer participants contributing to the savings pool.

In developed markets, most of these pensions are stated in nominal terms, but some are tied to price indexes. If inflation were to rise substantially, more pension funds may choose to provide some indexation. Consequently, finding ways of mitigating inflation has become important for most pension managers, as inflation is one of the potential risks associated with the solvency of their schemes.

In this chapter, we focus on how inflation can potentially influence the solvency of pension funds; we review how private pension plans in selected countries differ in their pension commitments, and methods of assessing the required contributions to the plan. We find that, while many countries have private pension systems with exposure to inflation, the discount curves used for valuation are almost always