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DB schemes have more than £1trillion of unhedged interest rate exposure

14 January 2016

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UK defined benefit (DB) schemes have more than £1trillion of unhedged interest rate exposure, despite the value of assets held on bonds nearly tripling over the past decades, new research has revealed.

According to Hymans Robertson, an independent pensions and benefits consultancy, the figures show there is a need for schemes to understand what their biggest risks are and "manage these strategically."

"Risk have not been paramount in people's minds and companies continue to foot the bill for this oversight," says head of corporate DB at Hymans Robertson, Jon Hatchett.

He adds that companies have tried to "plug funding holes" since the start of the millennium, but deficits have remained stubborn – something he blames on the industry's lack of focus.

"The industry has spent far too much time debating what it expects to happen and far too little focussing on what might happen," he said.

"It's noteworthy that the three big positions taken by most schemes since the start of the millennium have backfired: equities are at half the level expected in 2000, interest rates have increased liabilities by more than 50% and continued rises longevity have added further 10-15%."

Hatchett says risk management should be higher up the agenda for DB schemes and that companies are running much bigger risks in their schemes than would in their core business.

The GBP 1trillion of unhedged interest rate exposure is just one example, he says.

"While both short and long term interest rates are low by historical standards, that doesn't mean it is a one-way bet that they will rise quickly from here."

"Since the start of the financial crisis commentators have been talking about yields rising faster than prices into markets and the majority have been proved wrong."

"Schemes need to assess their strength of belief in generating a return and their capacity for loss if they are wrong – from this they can right size the level of exposure they want to run."

First published 14.01.2016

Lindsay.sharman@wilmingtonplc.com