06 March 2008

NAPF: Schemes are not using matching or hedging strategies to reduce liability risk

Schemes are not using matching or hedging strategies to reduce liability risk, Pension Protection Fund research reveals. The lifeboat fund’s survey – which was carried out by KPMG and examined 95, mainly large, pension schemes with assets worth more than £190bn – revealed most schemes only matched or hedged a “small proportion” of liabilities against exposure to risks such as inflation and interest rates.

But it found funding tended to be nearer 100pc in schemes that hedged a large proportion of liabilities.

PPF chief executive Partha Dasgupta said: “Our survey found that there has not been the headlong march into hedging as people first thought – a finding echoed in the NAPF's own research.

“During the next year, our survey shows that there will not be much activity in this area although it will increase during the next 10 years, possibly as schemes realise the recovery plans they put forward to the Pensions Regulator.

He added: "We do not have a view about how pension schemes should invest. It is up to individual schemes to assess how much risk they want to take. But, we would encourage schemes to fully understand the impact that their strategies may have on the total levy – and what they might do to reduce that impact.”

The PPF ruled investment risk out of the levy calculation last year as most schemes were investing in much the same way and this would not effect the way the levy was distributed.

But Dasgupta said the PPF would now consider if hedging strategies will effect this decision.

He explained: "We now want to ask the question: will investment strategies differ to such a degree as more funds use hedging strategies that they should be taken into account when we calculate the pension protection levy?

“We also want to highlight the impact that investment risk has on our own funding and, therefore, on people's levy bills."

Dasgupta said the issue would be addressed in a forthcoming consultation on the future of the pension protection levy to be published later this year.

The PPF survey also revealed that 38 schemes used swaps. Of these, half allowed active bond managers the freedom to enter into swaps to better manage their portfolio but only 12 of the 38 employed swaps to specifically hedge interest and inflation risks.

28 of the remaining 57 schemes not using swaps had formally considered the instrument in a bid to manage exposure to interest rates and inflation.

by Jonathan Stapleton

© NAPF - National Association of Pension Funds