UK - Fears over a looming global credit crunch could derail heightened interest in liability matching strategies from UK corporates, it has been claimed.
The FTSE 100 index bounced back slightly this week having suffered its biggest one-day points loss in more than six years on Friday, as investors pulled cash out of shares fearing a collapse of the financial markets driven by the sub-prime mortgage crisis in the US.
David Fogarty, worldwide partner at Mercer Investment Consulting, said a more favourable interest rate environment had fuelled interest from companies in the first half of 2007 in using swaps to match their pension scheme liabilities.
“My sense was that we would see many companies move to implement liability matching strategies through swaps before the end of this year, but recent trouble in the credit markets may derail some of that,” he said.
“There is more nervousness about using swaps at the current time because of the situation in the credit markets.”
On Friday, the FTSE 100 was trading below its opening mark in 2007 of 6220.8, meaning all the gains made this year by London’s biggest companies were wiped out.
The losses came about a month after the FTSE reached a seven-year high, closing above 6,700.
Dominic Delaforce, client director and co-head of LDI at Aberdeen Asset Management, agreed the current environment could deter pension funds from implementing swap solutions.
However he believed they were more likely to be put off by the decline in stock markets and bond yields than a credit market crunch.
“On the balance, those two valuation moves is what is going to cause people to sit back and think as opposed to the credit crunch per se,” he said.
“But having said that, as a whole UK pension funds have been implementing relatively cautiously and I think that’s likely to continue.”
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