UK - Pension funds are increasingly drawn to using derivatives to hedge risk, according to a survey by Watson Wyatt.
The value of over the counter derivative transactions carried out by the consultants this year has already superseded that done in the whole of 2006.
Nick Horsfall, senior investment consultant, Watson Wyatt commented: “In this increasingly ‘risky’ investment environment, demonstrated by the recent increased volatility in all markets, the interest rate and inflation swaps used by our clients have proved their worth in managing deficit risk.”
Figures quoted by the company show a typical £500m swap executed three months ago would have reduced the financial impact of recent interest rate falls by around £40m.
Watson Wyatt also claimed there had been growing interest in sophisticated liability-hedging solutions from Continental Europe and the United States. This, it was noted, was aided by the development of non-Sterling denominated instruments.
Horsfall added, however, that swaps were not suitable for every pension fund and liability driven investment (LDI) using derivatives often required significant governance resources.
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