swaptions to enhance yield

Case studies

Selling some of the upside of interest rate rises

With the view that yields are likely to stay low in the near term we helped our client exploit an opportunity in the derivatives market by designing a simple swaptions mandate. This pension scheme was already well hedged with 80% of its liabilities covered by swaps in its LDI portfolio and whilst the scheme did not have any explicit plans to further hedge its liabilities, it was recognised that it would probably do so if market interest rates were significantly higher.

The background

  • Large pension scheme with c. £1bn in assets
  • Well hedged with 80% of its liabilities covered by swaps in its LDI portfolio
  • An aversion to adding hedging at current yields

Our solution

In mid-September 2015, we worked with our client to implement a swaption mandate. In doing so, our client sold the upside of long-term interest rates rising by more than 1.5% pa over the next 5 years.

What were the potential outcomes?

  1. If 30 year interest rates don’t rise by 1.5% pa they are £2.75m better off compared to doing nothing
  2. If 30 year interest rates do rise by more than 1.5% pa, interest hedging is put in place at 1.5% pa above that currently available and the funding position is expected to be much better

This strategy best suits pension schemes that…

  • don’t want to fully hedge liabilities at today’s levels
  • already have a bespoke LDI mandate in place

The results

By forgoing some of the potential benefit from rising long-term yields, our client was able to increase their portfolio yield by £2.75m

Our client promise

In this video, Peter Thompson shares his personal experiences of working with us throughout his years as a professional trustee.