UK – Consulting firm Hewitt Associates says more than 25 of its clients are implementing liability investment approaches using swaps.

“During the last 12 months over 25 Hewitt clients representing of the order of £30bn (€43.9bn) have implemented, or are in the process of implementing, liability driven investment approaches using swaps,” Hewitt said.

“Inflation swaps have become an important risk management tool for many pension schemes. Three years ago the inflation swap market was considered too small to be a viable choice for pension schemes,” said Andrew Tunningley, head of Hewitt’s UK investment consulting practice.

“Market commentators now estimate that over the last 12 months, the UK inflation swap market grew four-fold, to around £12bn.

“Demand for long dated inflation assets is now outstripping supply and we would urge clients to think carefully, considering all alternatives open to them, before taking the decision to lock in at today’s price.”

In November last year Watson Wyatt said pension fund demand was set to triple the size of the inflation-linked swaps market in the UK.

Hewitt has commissioned a survey of 390 company executives, pension trustees and pensions professionals and found that liability driven investment is now deemed more important than ever.

The research found that the recent equity market recovery has led many schemes to look to lock in improved funding positions and reduce risk.

“More than half of those surveyed are proactively looking for a better balance of risk and return from their investments, relative to their liabilities,” Hewitt said. “A further 37% of those surveyed are specifically pursuing investment approaches that are closely linked to liability cashflows and use instruments such as swaps.”

“Being able to balance the risks and rewards associated with investment is not an easy task and in order to get it right, it is vital that liabilities are at the heart of the company and trustees’ investment decisions,” said Tunningley.

“The focus on liabilities should not just be used for decisions on asset allocation but also on how the assets are managed. It would seem that clients are more aware of this than ever before.”