GLOBAL - Schemes need to prepare for the return of inflation in case central banks fail to control upward pressure on prices, Watson Wyatt said.
The consultant said a weak economic recovery would keep inflation low for several years - but warned of potential significant increases in the medium to long-term.
It said accurately timing protection strategies for schemes would be difficult due to the volatility of the return to higher inflation.
And it explained central banks could exacerbate a return to higher inflation by failing to withdraw quantitative easing programmes smoothly.
Watson Wyatt global investment committee chairman Robert Brown said: "When inflationary pressures do return, we are somewhat sceptical that central banks can smoothly manage an exit from the monetary policy response, and could fail to adequately control the inflationary pressures that emerge.
"In addition, if developed economies recover robustly and credit creation returns, inflationary pressures will emerge faster than we expect."
Watson Wyatt also warned about material downside risks to inflation in the near term in the event of another significant political or economic crisis - a move it said could cause another reduction in economic activity and perpetuate deflationary pressure.
Brown added: "Clearly, another crisis could emerge at any time and the current state of the global economy means a near-term shock would be particularly deflationary.
"However, we do believe policymakers have shown the ability and willingness to do whatever it takes to avoid the pain of an entrenched debt-deflation spiral and do not view persistent deflation as a likely outcome. However, lingering inflation rates close to zero are plausible, especially in the US."
Watson Wyatt said its central view was relatively high inflation of between 3-4% per annum would return after three or more years.
Brown said: " While this appears a distant prospect, investors should be assessing its potential impact and planning timely protection strategies, particularly those institutional funds with large inflation-linked liabilities.
"These could include hedging strategies using inflation-linked physical bonds or swaps."
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