Pension schemes placed less emphasis on inflation hedging in the last quarter of 2009 (Q4 2009), according to F&C's latest Liability Driven Investments (LDI) Survey.

The survey, which is conducted on a quarterly basis by the Asset Liability Management (ALM) team at F&C, is based on responses from the derivatives trading desks that deal most closely in pension liability hedging at major investment banks.

A 37 per cent fall was recorded in Q4 compared to the previous quarter.

F&C cites unattractive markets in Q4, with lows from the start of the quarter, as a reason for this decline. Inflation fears also remain a concern for trustees, and F&C expects any fall in inflation rates to stoke demand.

"These figures validate the view that trustees are taking more tactical views and they continue to expect nominal yields to rise in the future," commented Alex Soulsby, derivatives fund manager at F&C. "UK government debt is rising sharply and while quantitative easing has more than absorbed the increase in gilt supply, the winding down of that monetary stimulus may lead to a rise in government yields."

There has also, F&C said, been a marked increase in sovereign risk, which is reflected in the risk in CDS rates in the UK, Spain and Ireland.

"If fiscal deficits arising from the crisis are not addressed and the market sees no credible way of the UK restoring balance to its budget and repaying its debts, fears of a risk in government yields will continue. This, coupled with the political uncertainty of an election year and the possibility of a hung government, means we expect more volatility in 2010."

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