Pensions - Articles - Pension schemes are avoiding hedging derivatives

 Derivatives and liability-hedging through financial instruments are foxing pension schemes looking to derisk as funding levels fall. Almost half of the largest pension plans in the United States are against using derivatives to hedge their liabilities or derisk their scheme through a buyout, despite reporting a rising level of deficits last year.

 The reluctance to use complex solutions to hedge liabilities has not been confined to the US. Mark Nicoll, Partner at consultant and actuary Lane Clark & Peacock in the UK, told aiCIO: "Our experience has been that a number of UK pension fund trustees have resisted using derivatives as part of their investing strategy for hedging."

 Nicoll said trustees found some of the structures too difficult to cope with.

 He added: "Derivatives can give you leveraged exposure, but investors will associate some of the difficulties in the financial crisis with complex financial products that include derivatives. I also expect the UK to have fared no better than the US in terms of funding levels. We don't see any evidence that UK trustees will undertake greater use of derivatives at this time."