UK - Inflation hedging among pension funds rose to its highest level in two years, up 16% quarter-on-quarter to £10.4bn (€12.2bn) of liabilities hedged, according to F&C's latest Liability Driven Investment (LDI) survey.

F&C said the volumes in the fourth quarter of 2011 did not necessarily reflect an increase in overall hedging, but was rather "a continuation of last quarter's dynamic switching between instruments used for hedging".
 
Alex Soulsby, head of derivative management, pointed out that inflation had reached new lows during Q4, providing a hedging opportunity for some of the more "nimble" schemes.

"Using index-linked gilts provided a cheaper method than inflation swaps," he said. "There has been an increasing interest in purchasing both gilts and index-linked gilts via total return swaps."

F&C pointed out that, while the Bank of England had continued to exclude index-linked gilts from its asset-repurchase programme, demand remained strong as investors fled the euro-zone.

"At the moment, the UK's gilt market is benefitting from being 'the last man standing' - a safe haven while many European governments' bonds no longer meet this criteria," Soulsby added. "This has been a step change and not likely to be reversed any time soon."

In other news, a recent SEI Quick Poll has found that controlling 'funded-status volatility' is now UK pension funds' biggest worry, with more than 60% of respondents describing it as a 'high' or an 'extremely high' priority.

The need to monitor schemes' assets and liabilities more closely also figured largely among the top concerns (60%), followed by the need for plans to meet funding goals (57%).

What is more, just over 40% of respondents said they planned to consider new models for the management of their investments over the next two years, SEI said.

Patrick Disney, managing director of SEI's institutional group in the EMEA region, said: "As markets continue to be volatile, schemes pursue sophisticated risk-management strategies designed to better control volatility of the funded status of their pension.

"Volatility has caused many pension schemes to review current practices and consider alternative governance structures and additional assistance from providers such as fiduciary managers."

SEI's Quick Poll surveyed more than 30 executives overseeing UK corporate defined benefit plans, ranging from £15m to more than £1bn in assets.

For a complete summary of the poll, please send an email to seiresearch@seic.com.

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