Research Shows Rising Popularity of Interest Rate Hedging Among UK Schemes

(August 5, 2011) — Data from F&C research shows that interest rate hedging is up 24% in Q2 this year among UK schemes.

“The second quarter results show that inflation hedging continued at similar volumes to previous quarters,” said F&C investment specialist director Nisha Khiroya, according to Professional Pensions. “Although there was less impetus for additional de-risking coming from improvements in funding levels compared to previous quarters, there was a meaningful opportunity from market supply.”

In Q2, the firm found that a total of £9.3 billion equivalent of scheme liabilities were hedged compared to £7.5 billion during the previous quarter. The firm added that the increase in nominal interest rate hedging was fueled by global events, such as the Japanese earthquake and Eurozone peripheral concerns.

Since F&C started tracking the numbers at the start of 2009, about £85.5 billion of UK pension liabilities have been hedged against interest-rate movements.

Separately, a June study by Allianz Global Investors showed European investors rank interest-rate risk as a top threat to their investments, followed by a stock market fall and Europe’s sovereign debt crisis. Among pension funds and other institutional investors in Europe, government credit risk ranked as the second-biggest threat to investments. Of the 156 respondents surveyed, about 47% of respondents cited government credit risk as a considerable risk and about 15% as a huge risk.

Perception of risk varied by location, the Allianz Global Investors study showed. Investors in Austria, France and Italy proved to be most concerned about sovereign debt risk largely as a result of bailout packages granted to Greece, Ireland and Portugal. Meanwhile, British and Scandanavian investors viewed declines in market prices as well as interest rates as the main risks.