UK - Babcock international is thinking of hedging interest rates as part of the investment strategy for its five UK pension schemes, following the establishment of a cross-party trustee committee.
Speaking at the NAPF annual conference last week, Andrew Birkett, group pensions manager at the firm, said the issues Babcock examined when looking at ways to de-risk its pension schemes, which have around £1.7bn of liabilities, were equivalent in value to approximately 50% more than the market valuation of the company.
Babcock was the first company to enter longevity swap for a pension fund earlier this year in a deal with Credit Suisse and the trustees of the Royal Devon Dockyards, followed by a similar transaction regarding the Rosyth Dockyards scheme. It is also in the process of negotiating a third transaction relating to the Babcock pension scheme.
The company is responsible for five DB schemes, and the three schemes mentioned are the largest with around 45% of total liabilities or £750m. But after considering the options of an "actual or synthetic buy-in" the company rejected an actual buy-in on the basis of expense, security and the need to pass over assets.
Birkett said "because of governance reasons we were not in a position to hedge investment risk and interest rates". This was because the five schemes have five sets of processes regarding trustee decision-making and investment strategy.
In order to try and tackle its liabilities management, Babcock has opted to first put in place a strategy to hedge longevity risk, then put in place an effective governance structure before putting in place a "consistent hedge for interest rate and inflation risk".
In relation to the governance issues, Birkett said at least two trustees from each of the five schemes have come together to set up a cross-scheme committee to "sit down and decide what they could do together". He claimed this has now resulted in "common" investment processes.
"We are now considering hedging interest rates as we can now do it in a consistent way across all the schemes," said Birkett.
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