Nothing seems to polarise opinion in investment circles more than the level and future direction of interest rates. This is problematic, as moves in long-dated rates have been the main driver of Defined Benefit pension fund financial health over the last decade.
DB pension schemes that hedged their interest rate risks before the summer of 2016 will have had the pain of recent falls in interest rates partly or fully mitigated. But many schemes have not – with long-dated gilt rates now below 2%p.a. have these schemes now missed the boat? Is it too late to hedge? In this piece we take a balanced look at the arguments for and against interest rate hedging at these levels and provide a framework to help all stakeholders move discussions forward.
Continue reading “Is It Too Late to Hedge?”
In the future, pension schemes may have to hold more cash or liquid assets in their strategic asset allocation. The impact on return is a key consideration. With the right allocations, this can be done without unduly impacting return.
Continue reading “Cash is King”
Derivatives can be powerful risk management tools for pension schemes, but the amount of assets that need to be held as collateral (to provide a buffer against adverse market movements) needs to be set carefully and monitored regularly as part of the scheme’s overall strategic asset allocation. The amount is likely to be between 26% and 40% of assets, depending on which stage the scheme is in.
Continue reading “Collateral – How Much Is the Right Amount?”
Most pension scheme trustees would agree on one thing. Long-term interest rates are at low levels in the UK today (compared to their history). It’s easy to find explanations for this among economists. It’s just as easy to find predictions … Continue reading Liability Hedging – A Rock and a Hard Place
In our previous RedBlog post, my colleague Dan discussed how to incorporate expected rate rises into the liability hedging decision. In this piece I offer an alternative perspective on yields and liability hedging. A Little Background Over the last few … Continue reading Liability hedging in a rising rate environment
EXECUTIVE SUMMARY Download the PDF version for offline viewing In May 2015 the UK reported its first year-on-year fall in the Consumer Price Index since the official CPI series began in 1996, with a -0.1% reading. Given pension schemes pay … Continue reading Should Pension Schemes Fear Deflation?