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08

Inflation hedging by pension schemes hits record high

Open-access content Thursday 30th August 2012 — updated 7.51pm, Wednesday 6th May 2020

The total value of inflation hedging transactions carried out on behalf of UK pension schemes hit a record high of £18.5bn in the second quarter of 2012, F&C Investments said today.


30 AUG 2012 | THE ACTUARY NEWSDESK: NICK MANN

The figure, which was published in the asset manager's latest Liability driven investment survey, is nearly three times the total value of inflation hedging transactions carried out during the same period in 2011. The research involves a survey of investment banks' trading desks.

According to F&C, the increase reflects pension schemes' continued focus on protecting against the risk of further inflation rises as the UK economy continues to deteriorate. Schemes took advantage of the relative cheapness of inflation-linked gilts and Retail Price Index-linked swaps to protect themselves against inflation risk.

Alex Soulsby, head of derivative management at F&C, said: 'Once again, our survey indicates record levels of inflation hedging activity on the behalf of UK pension schemes. Volumes were in part due to two long dated gilt syndications during the second quarter.

'However, the continuing uncertainty in economic outlook, and expectation that the Bank of England will expand quantitative easing, continue to impact how UK pension schemes manage and hedge their risk, and what instruments they are using to facilitate this.'

In terms of interest rate hedging, which aims to reduce the risk from interest rate fluctuations, transactions remained at a similarly high level as the previous three quarters, at £12.9bn of equivalent liabilities.

Among those surveyed by F&C, the overall forecast for the third quarter was that interest rates will fall and inflation expectations will rise. This is despite already depressed levels of interest rates and is the first time the survey has shown a balance of views forecasting a fall in nominal rates since the start of 2009.

This article appeared in our August 2012 issue of The Actuary.
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