U.K. RPI Change May Cut Pension Swap Values
Pension funds that use swaps to hedge inflation-linked payments may be forced to post more collateral should the U.K. adopt proposals to lower a benchmark inflation measure.
A reduction in the Retail Price Index would reduce the value of the swaps and increase the collateral required by bank counterparties.
“This is a step change that will have an unintended effect on schemes that are fullyhedged”, according to Jeremy Stone, chairman of the trustees at the 1.5 billion pound ($2.4 billion) WH Smith Plc. pension fund, which bought inflation swaps in 2005.