Rexam Pension Plan took advantage of a brief funding peak earlier this year to increase its inflation hedging and insure against equity losses, as more schemes implement trigger-based derisking strategies.
The nascent recovery in developed market equities has improved the funding situation at some defined benefit schemes, moving them towards triggers commonly based on asset-liability ratios or market indicators.
Rexam hit full funding in May, triggering an increase in its inflation hedge to 70 per cent of its liabilities from 60 per cent, and the purchase of some protection against equity losses.
“The funding level changes daily with movement in asset values and interest rates and as expected it has dropped below 100 per cent since May,” read the scheme’s latest report to members.
Your derisking mechanics
Triggers are a good sense-check to keep DB trustees from getting carried away with market gains, reminding them of their longer-term strategy, said Allan Lindsay, head of investment consulting for the north at consultancy JLT.
“The trustees [could be] starting to think we can ride it a little bit further. The investment adviser, or whoever has set it up with them, can say to them, ‘this is what you set up [the triggers] to do’,” he said.
But Lindsay added schemes should be clear on how and when they want that trigger to be reviewed so there is no room for ambiguity as to whether a derisking action needs to be taken. “It is making sure you are clear what your trigger is,” he said.
At the same time, schemes have been encouraged not to stick blindly to their pre-agreed derisking schedule.
Steven Dicker, partner at PwC and lead of its pensions risk management business, said a scheme should take into account three factors when evaluating the time to derisk: its funding level, the market environment and the strength of the sponsor.
“There is still the question of what has happened to the sponsor in the meantime,” he said. “If the sponsor covenant has improved you might want to slow down the derisking.”
Rexam also saw the adoption of a new benchmark for its interest and inflation hedges, based on cash flows, which the scheme told members would more accurately reflect the change in its liabilities over time.
Schemes designing the benchmark for their inflation and interest rate hedges typically use their liability cash flows as a starting point said Robert McElvanney, senior investment consultant at consultancy Aon Hewitt.
"Then you can measure the hedge you actually have against that benchmark," he said. "If the benchmark goes up by 5 per cent over the period you are looking at, what did your hedge do? If you have completely hedged you would expect it to go up by 5 per cent as well."
The scheme declined to add further comment to the published material.
