Pensions Worry More about Inflation, Less about Interest Rates

(November 5, 2009) – Pension funds increasingly are looking to hedge against possible inflation—at least in England.

United Kingdom pension funds hedged more than $15 billion in inflation liabilities from July through September, according to a survey of derivative trading desks conducted by F&C. This indicates an increasing concern about rising inflation following huge injections of liquidity into global markets, moves that have caused fierce partisan divides in both America and Britain.

According to the study, pension funds were quiet on this front in the first two quarters of 2009 before moving rapidly and en masse in Q3. Data show that, while hedging against inflation fell in this quarter, inflation hedges increased. Overall, the study estimates that actual liabilities hedged against interest rate increases fell by about a third in Q3.

Alex Soulsby, a derivatives manager at F&C, claimed that the decline in interest rate hedging was a direct result of pension funds feeling that hedging against interest rates at current rates will not garner value, according to IPE.