08.29.2011
By Terry Flanagan

Institutions Heed Inflation

Concern over short-term inflation introduces some new offerings for institutions.

According to a recently updated institutional investment survey conducted by global consultancy Mercer, roughly 50 percent of U.S. defined contribution plan sponsors are offering, or planning to offer, inflation protection to their participants.

The most common method implemented is standalone Treasury Inflation Protection Securities (TIPS), present in 24 percent of plans. The survey pooled 200 defined contribution sponsors.

“Defined contribution plans traditionally are using standalone TIPS, but they’re adding more diversification strategies to protect against inflation. Many prefer all-weather strategies over than just TIPS,” said Toni Brown, director of U.S. client consulting for Mercer’s Investment Consulting.

Although each plan is different, the survey reported that TIPS are more widely used than a combination of asset allocation via multiple asset classes, which only garnered 12 percent of plans’ support as an inflation hedge. Another 10 percent of sponsors intend to offer some type of strategy within the next year, and the remaining some 50 percent have no plans to fight inflation…yet.

Brown noted that these new defensive strategies arose from the threat of near-term inflation. “Like most people, institutions are nervous about inflation, but diversification protection strategies are beneficial even in non-inflationary environments,” she said.

Institutions, mainly public pensions that offer defined benefit plans already hedge against inflation with “direct exposure to real estate,” according to Brown.

“But inflation is still a top concern—many of them have increased their allocation to fixed income, since the issues are all about funding status and managing liabilities,” Brown told Markets Media. “That means that short-term investments to fixed income will be impacted in the short run.”

When analyzing inflation protection strategies by plan size, those plans with $1 billion or more in assets were most likely to offer or plan to offer some type of inflation protection, at 66 percent, while those with $250 million or less were least likely, at 37 percent.

Brown noted that differences can be attributed to larger plans usually having more involvement from the finance or treasury groups.

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