The National Association of Pension Funds (NAPF) has called for immediate action to help defined benefit (DB) schemes and their sponsors navigate the DB transition as smoothly as possible.

It its report, DB run-off: The demand for inflation-linked assets, the NAPF said that as DB schemes mature, there is likely to be a continuing increase in liability hedging.

The report also highlighted the gap between supply and demand of index-linked gilts.

The NAPF said that if schemes are unable to access the assets they need to adequately meet their cash flows and hedge their liabilities, then this is likely to expose scheme sponsors to increases in deficit volatility and put more pressure no them to support funding levels.

According to the NAPF, there are three areas that require action to help pension schemes:

- increased issuance of index-linked gilts
- better availability of alternative inflation-matching assets
- development of a framework that allows for more flexible models of DB pensions provision

Graham Vidler, NAPF director of external affairs, said: "DB schemes are currently struggling to access a sufficient supply of the types of assets they need as their scheme matures.

"If, in order to reduce volatility, schemes are forced buyers of liability matching assets with low or negative real yields, sponsors will be called upon to fill any shortfall that can no longer be met through scheme investments.

"Unless the supply of assets is addressed, and quickly, the costs of providing member benefits could continue to rise and place even greater pressure on scheme sponsors."

He added that although there is no "quick fix" solution to the problem, immediate action in the three areas that have been mentioned should help pension scheme to manage the transition as smoothly as possible.

First published 17.06.2014

monique_simpson@wilmington.co.uk