Corporate pension plans in the U.S. may be driven to use inflation hedges, according to wishful bankers and dealers. They reason that because companies will soon be required to match pension assets and liabilities and include pension deficits on their balance sheets, the need to show that something is being done to mitigate inflation will drive them to the marketplace.
In Europe, similar legislation has already been passed, and many funds' liabilities are indexed to retail prices. In the U.S., however, only a handful of funds are indexed to cost-of-living, but sales officials say these funds could be big users of Consumer Price Index-linked swaps.
The swaps themselves cannot make up existing deficits but they can limit even greater erosion exacerbated by excess inflation, structurers point out.
European firms including ABN AMRO,BNP Paribas and Barclays Capital, which have established inflation desks in New York, are among firms pitching the swaps to potential U.S. users and officials at these firms expect their experience in Europe to give them a head start. "No one is doing this yet; it's more on a discussion basis," admitted one senior sales trader. He noted he has also met with pension fund actuaries to discuss inflation swaps.
Paul Morgan, senior consultant at Norwalk, Conn.-based Evaluation Associates, said the FASB and Pensions Protection Act changes have got pension plans thinking more seriously about hedging liabilities, but he noted the firm has not seen any application for inflation swaps from a fund. "From a theoretical standpoint, it makes a great deal of sense," he noted, adding it may take some time for pension funds to get up to speed with inflation hedging. "Everyone is still in an education mode right now."
Julia Coronado, inflation-linked strategist at Barclays in New York, said the firm expects pension funds in the U.S. to move slowly toward inflation hedging. Corporate funds will likely be driven by pressure from constituents and investors to clear up deficits. "Pension funds do not move over night," she noted. "That's probably where the market is going, it's just not going there quickly," she added.
