Total return swaps – pension funds seek security in uncertain markets

With many pension funds needing to boost returns to make up poor funding levels while balance sheets remain at a premium, the total return swap market has grown in leaps and bounds. But there are some who see a familiar story of banks pushing products while ignoring the risks. Laurie Carver reports

 

In the wake of the financial crisis, pension funds all over Europe have been struggling with below-par funding ratios and the resultant simultaneous need to take on more risk while shelling out less of their balance sheet.

A total return swap (TRS) is one way of getting that exposure without the initial capital outlays (see box, page 14). The return on some given reference asset – coupons, dividends and mark-to-market changes – is swapped in exchange for a floating rate, usually a spread above