Pension scheme inflation hedging grows 11% in Q3

Inflation hedging by pension schemes has increased by 11 per cent in the third quarter of 2016, BMO Global Asset Management has reported.

According to BMO’s quarterly Liability Driven Investment (LDI) survey, inflation hedging grew from £23.2bn to £25.8bn, the second most active quarter in LDI’s history.

Increased activity in Q3 mainly comprised of new client hedging following a growth of client appetite to de-risk in outright terms at an accelerated rate than the previous quarter.
In addition BMO noted a continued trend from the previous quarter which saw schemes moving out of swaps in bonds, particularly in real estates.

The survey also questioned respondents on their views on likely policy and insurance changes to be announced in the Autumn Statement which revealed that counterparties are expecting a modest loosening of fiscal policy with a corresponding increase in the forecast gilt issuance.

“With the market still reeling from the result of the EU Referendum, the Bank of England (BoE) relaxed its monetary policy in August. Looking ahead, fiscal easing is expected from the government at the Autumn Statement. However the risks are finely balanced and the reduced liquidity often seen towards the end of the year could result in exaggerated moves in rates.” said BMO Global Asset Management LDI portfolio manager Rosa Fenwick.

“Given the backdrop, our counterparties now predict a fall in the inflation rate and a rise in nominal and real yields, however with low conviction on each metric. This highlights the uncertainty in the market and the impact that monetary and fiscal policy can have on the progression of rates”

“In terms of what this means for LDI clients, there are considerable risks in delaying planned hedging until after the Autumn Statement and it may make sense to accelerate existing timetables. An alternative would be to put market-based triggers in place so that even short-term upward moves in yields can be captured.”

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