U.K. pension funds more than doubled the amount of derivatives used in 2006 to about £20 billion ($39.05 billion), according to estimates by Watson Wyatt Investment Consulting. The value of derivatives used by U.K. pension funds stood at about £9 billion in 2005 and £3 billion in 2004. The sharp rise indicates high demand among trustees and pension fund sponsors for derivatives to better match assets with liabilities in an environment in which bond yields are relatively low, said Nick Horsfall, senior investment consultant at Watson Wyatt.
"While £20 billion is a lot of money, it accounts for maybe 2% of (total U.K.) pension scheme liabilities," Mr. Horsfall said. "We're expecting the use of derivatives to continue to rise, to perhaps £30 billion this year."
In 2006, Watson Wyatt advised about 15 to 20 pension funds in 35 executed derivatives transactions totaling £12.4 billion, with inflation and interest-rate swaps and options typically used to manage interest rate risks. The investment consultant separately advised on another £1.3 billion in equity options to manage equity risk.
