Companies considering offering pension increase exchanges (PIE) should “consider carefully the liability hedging implications of a high take up rate”, SSGA has warned.

State Street Global Advisors (SSGA) head of liability driven investment across EMEA Howard Kearns advised trustees and sponsors of defined benefit (DB) pension schemes, who are seeking to reduce the risks in their liabilities scheme, to consider the impact on their liability profile and risk exposure before making PIE available to members.

Kearns used the reports of BAE Systems’ recent PIE exercise take-up of 40 per cent as an example of how it can have a significant impact on a liability profile in the longer term. According to Kearns, the scheme’s current pensions in payment will increase significantly, and it will have to utilise fewer inflation-linked bonds, replacing these with nominal bonds, to match the new risk profile.

He added: “This also directly impacts the structure of the company’s target hedging portfolio, perhaps leading to a 25 percent turn-over of the portfolio. Pension schemes embarking on a PIE exercise must have a clear strategy for how they will adjust their hedging portfolio depending on the outcome of the exercise to ensure that the new risk exposures are managed appropriately.”

PIE allows members to exchange their inflation linked pension for a higher but non-increasing pension.

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