UK - The UK inflation swap market has grown four fold over the past 12 months as pension schemes rush to harness their liabilities through risk management tools, a new survey has found.
The Future of Occupational Pensions study commissioned by Hewitt Associates revealed that many schemes are looking to lock in improved funding positions and to reduce their risk exposure in the wake of the recent equity market recovery.
Andrew Tunningley, head of the UK investment consulting practice at Hewitt, said: “Inflation swaps have become an important risk management tool for many pension schemes. Three years ago the inflation swap market was considered too small to be a viable choice for pension schemes. Market commentators now estimate that over the last 12 months, the UK inflation swap market grew four-fold, to around £12bn.
“Demand for long dated inflation assets is now outstripping supply and we would urge clients to think carefully, considering all alternatives open to them, before taking the decision to lock in at today’s price.”
The survey of 390 company executives, pension trustees and pensions professionals found that 37% of the respondents were specifically pursuing investment approaches closely linked to liability cashflows, and employing instruments such as swaps.
Hewitt also reported that during the last 12 months more than 25 of their clients, representing assets amounting to £30bn, had implemented, or were in the process of implementing, liability driven investment approaches using swaps.
More than half of those surveyed were proactively looking for a better balance of risk and return from their investments, relative to their liabilities, and 60% believed the primary role of investment strategy was risk management rather than return management.
The practicalities of changes to the legislative environment resulting from the Pensions Act 2004, the impact of FRS17, overall equity market volatility, and falling bond yields, had all combined to form a backdrop to these findings, said Hewitt.
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