New industry index reveals impact of different hedging strategies

Funding for a scheme with a fully hedged strategy would have fallen from 80 per cent to 69 per cent between January and October 2022, according to a new self-sufficiency index from Broadstone, the Sirius Index.

The index, which track the progression of pension schemes to low-dependent or ‘self-sufficient’ status, attributed the fall in funding level to the decrease in growth assets, which more than offsetting recovery plan contributions.

However, Broadstone clarified that the funding level only tells part of the story, pointing out that although the funding level has fallen by just over 10 per cent, the deficit has remained similar at £10m.

In contrast, the index revealed that half-hedged schemes would have improved funding to 91 per cent over the same period, with a significant improvement in the funding level over the past 10 months, especially when compared to a fully hedged scheme.

According to the index, assets for the underhedged scheme fell by less than the liabilities, with the funding level improving to 91 per cent at the start of November, while the deficit fell by more, to below £3m.

In light of the findings, Broadstone encouraged pension scheme trustees of underhedged schemes to review their hedging in the light of lower asset values and rapidly changing inflationary expectation and consider monitoring the position so that growth asset risk can be reduced as the funding position improves.

Broadstone head of consulting and actuarial, Nigel Jones, stated: “We are pleased to launch the Broadstone Sirius Index (BSI) which brings a unique perspective on the benefits of hedging or otherwise in the journey schemes are on to reduce risk and reach low dependency.

“Low dependency is an important goal that allows trustees and employers to push on towards buy-out and benefit security for all their members.

“Our evidence base is already highlighting the different experiences of varying strategies and the decisions trustees make at this point will be crucial to their path over the next 5 years and beyond. We look forward to future releases of our monthly tracker and are sure it will be a useful part of the discussion”.

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