With inflation persistently high and economic growth slowing down, there are fears of a recession later this year. “The scale of the economic damage will depend on how far central banks are prepared to go to bring down inflation,” says Pete Hykin, CEO and Co-founder at workplace pension provider Penfold. “When they take stock of the potential damage caused, it’s likely they will eventually stop raising interest rates and learn to live with higher inflation.”

As a result, it’s likely that pension funds will rethink bonds for income, Hykin explains. After years of rock-bottom interest rates, bonds have started to offer more attractive yields. “Short duration bonds may come in favour, as they provide higher yields and are less sensitive to changing interest rates.”

This year has seen renewed optimism in equity markets, which make up many pension fund investment portfolios. Stock markets in the US and Europe have bounced back after dramatic drops last year. Hykin is expecting more volatility this year, but that could present attractive entry points for long-term investors who focus on profit margins and valuations.

“When thinking about the direction of equity markets for investment, we’re cautious on short-term investment rallies. There’s potential for more market volatility due to sticky inflation and the impact of central bank tightening.”

Fundamentals matter, says Hykin: as the era of cheap money ends, it’s likely that individual company merit will become more important when investing.

The recovery timeline for pensions from the impact of high inflation is influenced by multiple factors. While a decrease in inflation offers some relief, the extent and speed of recovery still depends on specific investment strategies, asset allocation and overall market conditions, Hykin explains. “It’s important to recognise that even after inflation recedes, it may take a substantial amount of time for pension funds to fully regain their pre-inflationary value.”

When it comes to pension scheme reporting, there are several considerations and concerns regarding the effects of high inflation. “Transparently addressing the risks associated with inflation and communicating them to members and stakeholders is crucial,” says Hykin. “Accurate and timely reporting is essential in providing a clear understanding of the pension fund’s performance and its ability to meet future obligations, ensuring trust is maintained among all parties involved.”

The biggest problem is that it’s taken too long for inflation to come down, says Lily Megson, Policy Director at My Pension Expert. “There is still a considerable way to go before the conditions for the security of people’s savings improve.”

The government needs to commit to providing adequate support to people concerned with their future financial prospects, she says. “Ensuring individuals understand where and how they can access independent financial advice would be a powerful move to helping savers to better understand the financial situation. More importantly, doing so could help them to remain on the right track to the financially secure retirement they deserve.”

In the current climate, the majority of easy-access savings accounts will not be able to keep pace with inflation, meaning that a significant number of people are seeing their money losing value in real terms, says Andy Mielczarek, Founder and CEO of SmartSave bank. Its research shows that 97% of the UK’s savers are relying on current accounts alone to house their money. Uptake for different savings products such as ISAs and fixed-rate bonds is low across the board.

“Even though pressures on the economy are gradually easing, it’s vital that people in a position to put money away each month are proactive about how they are managing their savings to beat inflation. For those looking to deposit a lump sum, fixed-term, fixed-rate bonds can be a good option when it comes to accessing higher interest rates, while many people could also benefit from exploring their options beyond the savings accounts offered by high-street banks.”

Pension funds need to consider alternative investment strategies, such as inflation-protected securities, commodities, or real estate, to help pension funds better weather the effects of high inflation, says Stephen Cork, Managing Partner of advisory firm Cork Gully. “High inflation is introducing unique challenges to the investment landscape as traditional fixed-income investments, such as bonds, can suffer from declining real returns in an inflationary environment. Equity investments may experience increased volatility, making it difficult to balance risk and return.”