How we helped our client manage RPI basis risk
The background
Like most UK pension schemes, our client was hedging its CPI-linked liabilities using RPI-linked assets. This meant if RPI fell without CPI following suit, the scheme would lose out.
Most pension schemes have no choice but to take this risk due to the limited supply of CPI-linked assets. However, given the sponsor of this scheme (a utility company) generates significant revenues linked to CPI, we devised an innovative way of helping both parties manage their risks and exposures.
Our solution
We proposed, facilitated and helped the trustees structure a CPI swap, which was transacted at better-than-market rates with no transaction costs typically paid to third party brokers.
The outcome
After this was put in place, RPI Reform meant that RPI-linked assets can expect lower inflationary increases, without any change to CPI. This was the exact risk scenario we anticipated and worked to protect against.
The innovative solution we put in place saved the Scheme more than £10m over 2020 (and also avoided the sponsor having to revisit its contribution schedule).
