image image

Inflation - addressing a core liability risk

Inflation - addressing a core liability risk

October 23, 2026 Fixed income

We believe plan fiduciaries should assess whether inflation represents a core liability risk rather than treating it solely as a secondary macroeconomic concern.

Inflation is not just a near-term consideration for investors. We believe that the world is shifting into an economic regime that we call “neofiscalism”, characterized by greater state involvement, deglobalization and rising structural spending pressures. Structurally higher inflation may be a consequence, a key consideration for some DB pension plans.

Unexpectedly high inflation can increase the value of liabilities for plans with explicit inflation-linked benefit features. The magnitude of exposure varies significantly by plan type and benefit design. Inflation is a particularly important liability risk for many public pension plans because benefits are often linked to inflation through cost-of-living adjustments (COLAs).

While inflation can affect all plans indirectly, corporate and multiemployer plans generally have more limited direct liability sensitivity, making inflation-linked exposures most relevant in the public pension context.

For plans with material inflation-linked liabilities, unhedged inflation can have significant and persistent funded status impacts.

While inflation exposure exists across many pension systems, the nature and hedgeability of that exposure differs meaningfully. Plans with explicit inflation-linked liabilities, such as COLAs or CPI-indexed benefit features, generally have the greatest potential benefit from dedicated inflation-hedging programs. Some plans’ benefit payments have explicit CPI linkages, like cost-of-living adjustments (COLAs). Even when subject to caps and funding triggers, which reduce sensitivity, the exposure remains.

Some plans also have other inflation risks, such as benefit components or interest crediting mechanisms indexed to CPI or inflation sensitive rates. Inflation exposure is also indirectly embedded in plan design, impacting wage growth assumptions. Absent formal COLAs, fiduciaries may elect for ad-hoc inflation adjustments during inflation spikes. A structural inflation-hedging policy can potentially mitigate these risks.

 

image
Click here to read the full whitepaper
453 kb
Back to top