Unfortunately, the use of long-only commodity indices has not helped pensions because these indices have been in an extended drawdown since the financial crisis. Using commodities has not helped pensions but actually caused a performance drag.
The solution to inflation protection is to think outside the immediate inflation securities box. Three alternatives come to mind, real estate, systematic trading, and commodity risk premium portfolios. Each offers a slightly different approach to providing inflation protection.
Real estate is a classic inflation hedge, but there are issues of liquidity and current valuations at this point in the business cycle. Leases should increase with inflation but investors will lock-in funds with limited flexibility.
Systematic investment strategies that could include risk parity that explicitly has commodity exposure or managed futures that actively trade commodities is another alternative. Investors will have significant liquidity. There also are implicit adjustments across asset classes through active management. Dynamic asset class adjustments could provide inflation protection as allocations are changed during an inflation shock.
A relatively new strategy would be to invest in a commodity portfolio that is based on commodity risk premiums. Instead of investing in a long-only basket with fixed commodity weights, investors would build a commodity portfolio based on well-defined risk premiums such as carry (backwardation/contango), momentum (trend), value, and volatility. This portfolio will be uncorrelated with core traditional assets and should be positioned to take advantage of inflation increases.
Thinking outside the TIPS box may allow pensions to have inflation protection but also receive a return that will not be a drag relative to the expected discount factor. This is a win in almost any environment.