A survey from BMO Global Asset Management found that pension schemes prioritised de-risking in the first quarter of 2017.

The quarterly LDI Survey found that both interest rate and inflation hedging activity rose – interest rate hedging increased by 7% over the quarter, to £29.7bn, and inflation hedging rose by 4%, to £24.8bn.

BMO said that buoyant equity markets and rising yields, driven by the expectation of a normalisation of monetary policy, improved the funding ratios of many schemes in 2016.

This, in turn, prompted schemes to de-risk and expand their hedging programmes.

The hedging activity, BMO said, comprised mainly new hedging activity from pension schemes, due to the increased appetite for de-risking.

Trends for the quarter also included relative value switching trades between equivalent hedging instructions to lock-in yield gains, and a rise in new low coupon bond issuances that allowed schemes to switch between individual bonds.

Switching between bonds enabled schemes to release cash and reduce their need for repo funding, BMO said.

Rosa Fenwick, LDI portfolio manager at BMO, said that positive equity market moves towards the end of last year led to a theme of protecting gains.

"Equities are still the most popular return asset and, despite their elevated levels, they remain an attractive long-term asset class," she said, "Pension schemes that are keen to retain long-term exposure but have short-term concerns, have shown interest in downside protection."

"The appetite for hedging using bonds over swaps, and indeed switching into bonds out of swaps, remained keen, despite the demand for bonds, which caused bonds to become more expensive relative to swaps over the quarter."

BMO added that this is a continuation of the theme from the end of 2016, where market participants have greater confidence in their ability to get funding.

First published 09.06.2017

Lindsay.sharman@wilmingtonplc.com