Pension funds treble use of derivatives, according to Mercer survey

The number of pension schemes using derivatives to hedge their inflation and interest-rate risks in connection with liability-driven investment strategies has trebled over the last year, according to a survey by Mercer Human Resource Consulting (MHRC) and the Association of Corporate Treasurers (ATC).

The survey revealed that 17.5% of the respondents are now undertaking interest rate hedging, an increase from 6.3% in 2006, and 16.5% are employing inflation hedging, up from 4.2% last year. Participants’ use of credit derivatives is now at 5.8%, an increase from 0% last year, and 28.2% used currency derivatives (no figures from previous years were available).

“Although the overall percentages are still relatively small, the increased use of derivatives is not unexpected given the marketing efforts by investment banks and the very clear potential of derivatives to contribute to risk reduction strategies,” said John Hawkins, a principal in Mercer’s financial strategy group. “It would have been surprising if growth of this order of magnitude had not been evident. Trustees are clearly becoming more comfortable with derivatives-based strategies.”

MHRC, the London-based human resources and financial services firm, and the ACT, the international body for finance professionals working in treasury, risk and corporate finance, carried out the survey in April and May. Chief financial officers and treasurers from 103 companies, most of which are in the FTSE 350, participated in the survey.