| Focus on liabilities boosts the use of derivatives by UK pension funds |
|
|
| 16/07/2006 | |
|
UK pension funds are opening up to the use of derivatives in order to better manage their liabilities, according to various pension market players. Pension funds generally look at derivatives as a mean of both boosting their returns and reducing their risk, hence increasing the efficiency of their investment portfolio, as well as getting exposure to new asset classes. According to Watson Wyatt Investment Consulting, the size of the UK market for end users of inflation-linked swap executions could double in 2006, fueled by pension funds looking for a closer match between their assets and liabilities. Based on the size of inflation-linked swap executions completed by Watson Wyatt so far this year, the market could exceed £20 billion by year end, from £9 billion in 2005. Fund managers are also reporting a strong interest for derivative products. "We are definitely seeing an increasing number of our UK pension scheme clients using derivatives in their bond portfolios," confirms Mitesh Sheth, investment director of liability-driven solutions at Henderson Global Investors. "That said, for many mature plans, underlying bond markets can still provide much, but not all, of the match for their liabilities. In these cases, however, schemes are increasingly turning to derivatives, chiefly to allow their portfolios to seek additional active returns. The use of interest rate and inflation swaps as part of the underlying benchmark can free up cash which can then be invested in actively managed portfolios. Regardless of scheme maturity, a key issue for schemes is the need to generate returns above current yield levels." Joe Moody, head of liability-driven investing at State Street Global Advisors, said that derivative investment was primarily a learning issue for trustees. "The use of derivatives to help manage pension liabilities is growing rapidly with those who want to learn," he said. "Using derivatives provides trustees with tools to remove and spend their risk budget more wisely, but trustees are struggling with the growing imbalance of knowledge. The issue for many is compounded by low governance budgets so the Pension Protection Fund will find good custom from those who struggle to understand risk. It will not find its custom coming from those with innovative deficit removal programmes that are now well underway." He also said that trustees did not all enjoy the same facility when deciding whether or not to resort to derivatives to better manage risks. "Trustees, who have access to their sponsors' treasury function, find that they can restructure balance sheet risk and use derivatives with shareholder approval. Whilst this is currently the domain of larger companies, the use of derivatives is about controlling risk but not necessarily at the expense of returns. Returns will pay pensions but deficits do not. Collective thought should be given to helping more of the smaller to mid size pension schemes." J.L. |
|
Articles of the same Topic : Derivatives |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it