09 February 2010
Published in: ALM, Longevity - mortality
Hedging of liability risks reaches new high in 2009
The liability-risk hedging market in the UK passed £40bn in 2009, topping the previous high of £35bn in 2007, according to estimates from Towers Watson. The firm acknowledges the precise scale of activity is difficult to measure, since most deals are conducted privately between banks and pension funds or insurers.
Towers Watson attributes the growth in the market during 2009 to increased use of physical bonds for matching, greater demand for buy-ins and the evolution of longevity hedging.
Paul Trickett, EMEA head of investment at Towers Watson, said: "The extreme market conditions which caused significant delays in the execution of derivatives-based liability-hedging strategies in early 2009 did not diminish demand by institutional investors for reducing liability-related risks through matching. This, combined with the greater availability of long-dated bonds; increased use of buy-ins and a growing longevity-hedging market, mean this market is back on the growth trend which started in 2004."
According to Towers Watson, the UK inflation-linked market for end users (excluding intra-bank trades) reached around £25bn in 2008, having been only £3bn in 2004 when the firm first started measuring it.
Trickett expects the market to continue to grow in 2010 in spite of volatile markets and continuing risk aversion from counterparties. Fiduciaries "can now hedge out a large proportion of interest-rate and inflation-liability-related risks whilst retaining exposure to non-matching, return-seeking assets," he says. "As a result, even funds with a reasonably significant exposure to return-seeking assets may still find hedging interest-rate and inflation exposure attractive." And he adds: "There are also an increased number of ways to hedge risk with greater flexibility enabling fiduciaries to choose the most suitable option."