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The Actuary The magazine of the Institute & Faculty of Actuaries

Hedges keep growing

Rather than simply reporting on buyout or buy-in levels, Towers Watson has attempted to investigate the total size of the liability risk-hedging market in the UK and claims that it has passed £40 billion for the first time in 2009. They attribute this to increased use of physical bonds for matching, greater demand for buy-ins and the evolution of longevity hedging.

Paul Trickett of Towers Watson, said: “The extreme market conditions which caused significant delays in the execution of derivatives-based liability hedging strategies in early 2009 did not diminish demand by institutional investors for reducing liability-related risks through matching.”

According to Towers Watson, the UK inflation-linked market for end-users (excluding intra-bank trades) reached around £25 billion in 2008, having been only £3 billion in 2004 when the firm first started measuring it. However, they caution that, “The precise scale of activity is difficult to measure, since most deals are conducted privately between banks and pension funds or insurers”.