Pension funds fear Eurozone debt threat

The F&C LDI Survey survey suggests that investors are increasingly concerned about the impact of deflation.

In the second quarter of 2010, UK pension funds decreased their inflation hedging by nearly a third compared with the first quarter of the year, but maintained similar levels of interest rate hedging.

According to the survey, this fall in inflation hedging can

be attributed to the combination of unattractive market levels, renewed concerns about the prospects of a double-dip recession and deflationary fears.

The survey also detected "an acute and prolonged period of pre-General Election wariness".

Alex Soulsby, derivatives fund manager at F&C, said: "Since the recent announcement of the use of CPI for private sector pension schemes there has been concern about the demand for inflation hedging using RPI products.

"However, the index linked gilt syndication on July 27 was attractively priced and demand was much larger than expected. This seems to suggest that these concerns are exaggerated."

The survey found there was a period of greater activity at the end of May when the Government issued a 40-year index-linked gilt. According to the research, this created a supply of inflation hedging in the market, which caused prices to fall and attracted a "reasonable flow" of buyers.

The F&C LDI Survey is conducted on a quarterly basis by F&C's Asset Liability Management (ALM) team.

It is based on responses from the derivatives trading desks most closely involved in pension liability hedging at major investment banks.