Breaking Down the Barriers to Hedging
A pension scheme of any size can access solutions to remove interest rate risk. Trustees need the right support and training to overcome the complexities - Emily McGuire, Partner, Aon
Pension scheme liabilities are highly sensitive to movements in long term interest rates. In fact, this is one of the biggest financial risks schemes face.
Our short note, Breaking Down the Barriers to Interest Rate Hedging, explores factors for trustees to consider when dealing with interest rate risk.
- Aon's analysis suggests that on average, closed and frozen schemes should be protecting against at least 70% of their interest rate risk. Instead, the average amount hedged is thought to be nearer 30% to 40%.
- When a pension scheme hedges out some of its fixed interest-rate liabilities, it effectively locks in a certain future rate. Many pension schemes have been holding off implementing this kind of protection until rates rise.
- Schemes must avoid falling into the trap of thinking this means they should remain exposed to interest rate risk.
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