UK - Three times more pension schemes are using derivatives to hedge their liabilities compared to last year, found a survey by Mercer Human Resource Consulting and the Association of Corporate Treasurers.
Some 18% of respondents to the survey said they were now using interest rate hedging, while 17% said they were using inflation hedging.
"Although the overall percentages are still relatively small, the increased use of derivatives is not unexpected given the marketing efforts by investment banks and the very clear potential of derivatives to contribute to risk reduction strategies,” said John Hawkins, a principal in Mercer's Financial Strategy Group.
The report also found that while the proportion of schemes making ‘special’ pension contributions to try to reduce fund deficits remained constant at around 60%, the motivation for these extra contributions had changed as follows: general pressure from trustees (almost 50%), strengthened mortality assumptions (18%), general risk mitigation (17%), Pension Protection Fund (PPF) levy considerations (15%) and reasons related to corporate transactions (15%).
Also, the number of respondents borrowing in order to make extra contributions increased from 12% to 20%.
Hawkins commented: "Given increasing pressure on trustees to seek higher funding levels by the Pensions Regulator, this trend is not unexpected Likewise, the arguments for raising finance to fund schemes are quite straightforward – not least the opportunities to reduce tax and the risk-based proportion of the PPF levy.
“Even if deficits continue to diminish as a result of movements in bond and equity markets, we can expect more CFOs and treasurers to appreciate the benefits of borrowing to fund remaining deficits."
Lastly, the report found the use of contingent assets remained a minority pursuit, at a level below 20%.
Of those schemes that confirmed this practice, over half were using parent or other group company guarantees that complied with PPF guidelines.
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