Deflation and pensions

Inflation is a key factor for many defined benefit pension schemes, and rates have fallen sharply over the last 18 months. Most economic commentators expect there will be some deflation in 2015, albeit possibly a 'blip'. However there is likely to be a risk of deflation for some time to come, as individuals and companies adjust their expectations downwards, and competitive pressure makes it difficult for companies to raise prices.

Most pension scheme designs will assume either implicitly or explicitly that inflation rates will always be positive, and the consequences of deflation are potentially complex and in some cases unexpected. In this Pensions Focus we look at the consequences of negative inflation in terms of benefit design, member communication, scheme funding, risk management and the potential cost of insuring benefits, and consider how employers and schemes could act to tackle the challenges that this brings.


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