This new working party of the IfoA’s Financial and Investment practice area held its first meeting recently, having attracted interest from over twenty members from across the industry (consultants, asset managers and insurers).

What is LPI?

DB pension schemes typically pay inflation-linked benefits with caps and floors (LPI benefits or “Limited Price Indexation.”) The presence of these caps and floors complicates the calculation of the inflation sensitivity (IE01) of these benefits. As a result many pensions Schemes adopt a ‘delta-hedging’ approach to the risk management of these LPI benefits.

The new LPI risk working party’s first task will be to undertake a comprehensive review of all the existing alternative methodologies used to calculate the IE01 of LPI-linked benefits. A case study will be used to illustrate the impact of adopting different methodologies. At this stage the working party is hopeful that following its research a framework and general guidance for calculating the IE01 of LPI-linked benefits can be issued providing assistance to all interested parties.

The importance of a standardised framework providing guidance on the calculation of the IE01 of LPI benefits predicates the requirement for research in this area, for the benefit of all actuaries, the wider industry and, fundamentally, clients and pension scheme members.

LPI