UK pension funds should avoid delaying de-risking strategies, as markets could move against them following the government’s next fiscal policy update, according to BMO Global Asset Management.

On 23 November, chancellor Philip Hammond will deliver the Autumn Statement, his first major policy speech since being appointed to prime minister Theresa May’s new Cabinet in July.

Rosa Fenwick, liability-driven investment (LDI) manager at BMO, said fiscal easing was expected but warned that investment risks were “finely balanced”.

She added that “reduced liquidity often seen towards the end of the year could result in exaggerated moves in rates”.

She added: “Given the backdrop, our counterparties now predict a fall in the inflation rate and a rise in nominal and real yields – however, with low conviction on each metric.

“This highlights the uncertainty in the market and the impact monetary and fiscal policy can have on the progression of rates.”

Investment-bank trading desks polled by BMO said they expected a “modest loosening” of fiscal policy and an increase in Gilt issuance, despite a recent sharp rise in yields.

UK 10-year yields registered an all-time low of 0.518% at the close of trading on 12 August but have since more than doubled to 1.169% on 7 November as prices fell.

“The market’s response to these policies, in terms of growth projections or issuance, could have a significant effect on long-term yields,” BMO said in a statement.

Inflation hedging by UK pensions increased by 11% in the third quarter, according to BMO’s quarterly LDI survey.

Investors hedged £25.8bn (€30bn) during the quarter, the asset manager reported, up from £23.2bn at the end of June.

Current government bond yields have “profound implications for LDI”, warned John Bilton, global head of multi-asset strategy at JP Morgan Asset Management.

Speaking at a press conference this morning, Bilton said pension investors would need to be more active and innovative in their asset-liability matching strategies in the future.

UK pension funds invested £741bn in LDI strategies at the end of June, according to a separate survey by KPMG earlier this year.

Data from the Pension Protection Fund indicated that UK schemes had an aggregate funding ratio of 77.5% at the end of September.

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