Despite £100bn said to have been added to the country's pension deficits in the recent market downturn, there is a window of opportunity for inflation hedging, claims independent consultancy Redington

Robert Gardner, the firm's co-CEO, says that reduced long-dated breakeven inflation rates are making inflation swapping and hedging more attractive than ever. Prices on 30 year breakeven inflation had been as low as 3.35% last week but have since rebounded to 3.48%, nonetheless offering "schemes with flexible Liability Driven Investment and dynamic de-risking mandates an opportunity to increase their inflation hedge ratios".

Gardner said: "As a pension fund you want to take advantage of these opportunities when they arise.  You want to be a place with the right infrastructure in place to take advantage and also to execute with the right instrument, whether that be breakeven inflation gilts, or inflation swaps 20 basis points more expensive".

Gardner told Pension Funds Insider: "Inflation has fallen along with signs of a slowdown in the world's major regions and a drop in equity prices".

He added: "I expect some pension funds that have a clear de-risking game plan in place, with an LDI fund manager plus a governance framework, to seize this opportunity. It's the kind of thing I would also expect pension funds who have appointed fiduciary managers to find themselves doing right now".

Recent global stock market turbulence have been less positive for other de-risking techniques though, with Gardner conceding: "Anyone close to doing a buyout is now a lot further away, unless they had succeeded in completely de-risking their assets two weeks ago".   

A survey from Hymans Robertson claims, however, that savvy pension funds have de-risked in large volumes in the second quarter of 2011. Total risk transfer deals are said to have totalled £1.4bn in the quarter, a 400% increase on the first three months of the year.

Patrick Bloomfield, partner and head of trustee solutions at the firm said: "The level of activity highlights how several schemes have taken the opportunity to de-risk at what appears to have been an opportune time. Market conditions were favourable throughout the quarter, but have turned dramatically in August's market turmoil."

First published 15.08.2011

dbillingham@wilmington.co.uk