Pension funds still shunning derivatives

Only 6% said they had used interest rate derivatives and 4% inflation derivatives, with none having used contracts linked to credit risk. But, according to Tim Keogh, a partner at Mercer, UK funds were expressing more interest in the use of rates and inflation derivatives, which are often used to guard against volatility and guarantee a certain return on bond-like investments.

Demand on the credit side, however, had been thwarted by regulatory pressure, he said. Funds in the UK have had to pay a premium into the Pension Protection Fund since April last year to provide compensation to members in the event of insolvency. But Keogh said the scheme does not as yet recognise the use of credit derivatives in reducing risk when assessing a scheme’s risk-based levy.

Lindsay Tomlinson, European vice-chairman of Barclays Global Investors, said that while derivatives use would increase, many funds were still being held back by the speed of decision-making at a trustee level.

“These are probably the most conservative set of investors you’re going to find who thought indexes were risky and exciting,” he said at a recent Risk conference. “But while there is an issue around the speed of decision making, at least there is a realisation that there is an issue there.”