In this article, Patrick Bone discusses how property, with its potential to offer a reliable real income stream, can also help to manage a pension scheme’s inflation risk.
Traditionally, pension funds have invested in UK commercial property to derive the benefits of diversification from other growth assets, income stability and a medium-term hedge against inflation. Whilst the degree to which property has met these objectives is open to debate, it is the latter characteristic that has come under particular scrutiny in the last couple of years.
Liability-driven investment strategies are becoming increasingly popular as a way for pension funds to manage funding level risk by matching the scheme’s asset to its liabilities. Similarly, we are seeing some pension funds switching their property targets away from relative return targets towards a defined margin over inflation (i.e. retail price index (RPI) + a margin). This partly reflects the view that property, with its potential to offer a reliable real income stream, can also help to manage a pension scheme’s inflation risk.