Incredibly (well to my mind at least) a recent survey conducted by KPMG unveiled by the Pension Protection Fund at the NAPF conference, has shown a worrying lack of interest by large pension funds for hedging strategies. The survey, of 95 large pension schemes, showed that only 40% of them were running interest and inflation hedging strategies. Partha Dasgupta, the PPF Chief Executive said: “Our survey found that there has not been the headlong march into hedging as people first thought - a finding echoed in the NAPF’s own research. During the next year, our survey shows that there will not be much activity in this area although it will increase during the next 10 years, possibly as schemes realise the recovery plans they put forward to the Pensions Regulator."

The key findings of the survey were:

i) many of the schemes estimate that only a small proportion of the scheme’s liabilities have been matched or hedged by investments in bonds ( and/or derivative overlays )

ii) Where a scheme hedges a large proportion of the liabilities, funding tends to be nearer 100 per cent. Where funding is significantly above or below 100 per cent, the proportion of liabilities hedged is significantly lower

iii) 38 schemes use swaps:
i.Half of these allow their active bond manager the freedom to enter into swaps to better manage their portfolio
ii.Only 12 of the 38 employ swaps to specifically hedge interest and inflation risks

iv)of the remaining 57, 28 schemes have formally considered the use of swaps in managing exposure to interest rates and inflation

You can see the full findings on the PPF website here