BA uses triggers to grab derisking opportunities

The scheme has put into effect a trigger-based framework to help identify opportunities to reduce interest rate and inflation risk. Derivatives have been used both to hedge against inflation and to extend the downside protection against falls in the equity market.

However, there has been debate about whether triggers used by defined benefit schemes added value to derisking strategies, with a report from consultancy Aon Hewitt showing four in 10 schemes hit triggers in the year to September 2013. 

In NAPS's investment report to members, scheme chair Paul Spencer said: “The scheme’s exposure to interest rates and inflation are among the key drivers in relation to the value placed on the liabilities.”

In 2012 the scheme committed itself to infrastructure investment to manage long-term inflation risk.

More firms are attempting to update and enable derisking strategies, allowing them to better make tactical decisions and take advantage of opportunities as they arise.

“[Schemes] are working on updating their liability-driven investment strategies towards adopting a more opportunistic approach,” said John Towner, director in the investment consulting team at Redington.

The maturing LDI market has led to more advanced approaches, which have become increasingly dynamic to make the most of changing conditions, he said.

The types of assets used have also changed. Where schemes may have been relying on bonds and gilts to derisk, more sophisticated tools such as swaps and derivatives are growing in popularity.

Diversified growth funds are also becoming increasingly available to smaller funds, though some experts have expressed reservations.

“The proof in the pudding will come when we see how [schemes] behave on approaching a distressed situation,” said Richard Butcher, managing director at independent trustee company PTL.

Consultants have stressed that the strategies have the capacity to be flexible, or that schemes act flexibly in the plan's application. The use of tactical assets can enable schemes to act on opportunities to increase growth without compromising their overarching strategy.

"You need plans but shouldn't follow them slavishly," said Nicola Ralston, co-founder and director of PiRho investment consulting. "In general we prefer to separate strategies from tactics."

Triggers can speed up tactical decision making by allowing managers to agree on conditions ahead of time, while still allowing trustees to intervene later if they see fit. 

While many schemes could benefit from a derisking strategy, with gilt yields still at perceived low levels schemes with a strong employer covenant may decide to limit their exposure until they are better value.

"You do need protection in play but you don't want to remove all risk at any cost," said Geoff Bauer, senior associate of the financial strategy group Mercer.