Interest rate and inflation hedging levels rose during the last quarter of 2015 according to BMO Global Asset Management's Liability Driven Investment (LDI) survey.
Total interest rate hedging activity during Q4 was the second highest level in the survey's history, and was up by 13% from £25.4bn in Q3 to around £28.8bn in Q4.
The quarterly survey, which polled the derivatives trading desks of investment banks on volumes of hedging transactions, found inflation hedging also grew by 8% during Q4, from £18.2bn to around £19.7bn.
This increase in activity coincided with recent changes to banking regulations which have made it more capital intensive for banks to hold gilts on their balance sheets.
This increased capital requirement comes at a cost which is being passed through to investors by way of higher gilt repo trading costs, causing investors to demand a higher yield for holding a gilt to compensate for this higher funding cost, according to BMO.
A combination of global events in January, including China's slowing growth and wage growth had put a dampener on hopes for an increase in the base rate with market expectations being pushed to mid-2017.
BMO Global Asset Management head of LDI client portfolio management Simon Bentley (pictured) said: "To ensure capital efficiency, most LDI portfolios are leveraged and therefore repo is commonly used to finance the purchase of bonds."
"Longer term concerns around gilt repo liquidity, combined with a short-term seasonal increase in gilt repo pricing, led to a bias towards swap based hedging at the expense of gilts in Q4. This further exacerbated the relative cheapness of gilts compared to swaps."
"There is a reasonable probability that the hike in rates won't now occur until 2017, as a result of unfavourable data releases and political uncertainty over the EU referendum.
"Nevertheless there is likely to be a degree of volatility around market expectations, which could create opportunities for nimble investors."
The Smiths Industries Pension Scheme has secured a £146m buy-in with Canada Life in its fourth bulk annuity and its sponsor’s tenth overall.
The Prudential Staff Pension Scheme has entered into a £3.7bn longevity swap with Pacific Life Re, insuring the longevity risk of over 20,000 pensioners.
The Baker Hughes (UK) Pension Plan has secured approximately £100m of liabilities through a buy-in with Just Group.
There have now been a total of 30 longevity swaps over £1bn publicly announced. The full list, provided by Willis Towers Watson and through PP research, is as follows...
The Reckitt Benckiser Pension Fund has secured a £415m buy-in with Scottish Widows, insuring the benefits of around half of pensioners.