UK pension funds’ £400bn gamble
We’ve written here before about how UK pension funds are woefully failing in their duty to hedge investment risks, and today fresh analysis sheds new light on the problem.
Aon Hewitt, one of the country’s top pension fund advisers, has issued a stark warning that UK schemes lack protection against long term interest rate rises worth about £400bn.
Pension plans that are closed or frozen to new entrants should be hedging about 70 per cent of their exposure to future interest rate rises, but in reality they only have 30 per cent to 40 per cent covered.
This is despite a surge in market expectations about the outlook for interest rates over the next five years, which could leave UK schemes squeezed on matching their pension payments.
Source: Aon Hewitt
“Our analysis suggests that on average UK pension schemes are leaving themselves over-exposed to long term rate changes when compared to many other risks. Why take such unbalanced risks? Even where pension schemes have taken action, the level of hedge taken is often still sub-optimal, and does not adequately address the issue,” Aon Hewitt, senior partner John Belgrove, said.
Pension schemes are holding off hedging this risk until rates start to rise – sadly this could be all too late.