Dutch pension funds are “sensitive to inflation” but are “not very well protected”, according to AXA Investment Managers (AXA IM) head of pension investments, Martin Sanders.

Speaking at an AXA IM webinar on Thursday 21 April on the global surge in inflation and the impact on pension fund strategies, Sanders noted that the inflation seen over the past decade has been closer to one per cent and now it is almost 10 per cent.

“It is important to know if this is a one-off shock, and if it is not, if it is longer-lasting, it will have a much severe effect on the spending power of our retirees,” he said.

In terms of asset classes pension funds can consider in this environment, Sanders said inflation-linked bonds stand out, as they are effective and a relatively cheap way to hedge inflation, but also easy to indicate in an LDI portfolio. He said that these are used already by many pension funds.

“More or less the same counts for listed real estate, and certain equity sectors that are in short duration, sensitive. It’s also relatively easy to fit them in the pension fund portfolio. But you must be willing to make the distinction from a global equity portfolio to carve out the long and short duration-sensitive equity sectors.

“A lot of talk has been about real assets, and direct real estate infrastructure, but also commodities or inflation options. They can be used – they are effective in higher growth, higher-inflation environments – but they also are more complex and more expensive and more difficult to monitor.

On the issue of rising inflation, AXA IM Head of Sovereign, Inflation and FX - Core Fixed Income, Jonathan Baltora, said we are in a similar position to last year in terms of what economists and portfolio managers believe. That is, that they expect inflation to slow down.

However, he said that AXA IM’s approach is that as long as they don’t see inflation slowing down, they don’t believe that inflation is slowing down.

“The rationale is that, at the same time last year, the market – what I mean by the market is the consensus of economists surveyed by Bloomberg – was expecting the inflation to peak in the U.S. around 3 to 3.5 per cent during June or July 2021.

"We are one year later, and we are more than twice higher than the peak that was expected by then. And that has been the story for inflation over the past 18 months to potentially pass 24 months since the current crisis. The peak in inflation continues to be revised higher, and the peak in inflation continues to be pushed further into the future.”

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