GLOBAL – Watson Wyatt says it has found that pension fund trustees, while starting to like the idea of derivatives, are less enthusiastic about structured credit arrangements like CDOs.

“There are some derivative strategies offered to pension funds that we have generally found trustees to be less enthusiastic about,” the firm was quoted as saying in an article in an industry publication.

It said structured credit arrangements such as collateralized debt obligations are “very complex and can be quite opaque”

“Pension funds will have to put in a lot of time and effort to understand the risks and returns of these structures,” the firm said in HedgeWeek. “Funds should be aware that the risks of a CDO are not the same as that of a corporate bond with the same credit rating.”

The article argued that many schemes are now starting to like the idea of derivatives, having previously seen them as too complicated, too dangerous, or offering no financial advantages.

Watson reckons derivatives can be wonderful tools for pension funds when they are used properly. “They can provide protection, enhance performance, and help match assets with liabilities.”

But it warns funds to make sure that “no unpleasant surprises” lurk within the strategies or instruments they are considering.

Last month the Organisation for Economic Cooperation and Development called for strict limits, if not outright prohibition, on pension funds’ use of derivatives with the potential for unlimited commitments.