Our clearly articulated financial risk management policies, covering a variety of market risks, help us reduce our exposure to the economic and regulatory environment, therefore providing more predictable returns to investors.
Our policy on inflation hedging is to match the debt portion of our RCV, offset by the effect of our pension scheme liabilities, with index-linked debt. This provides equity shareholders with a reliable one-to-one exposure to RPI movements, controlling the risks of unexpected movements in inflation.
Interest rate exposure on our remaining nominal debt is managed by fixing the underlying interest cost out to 10 years, on a reducing balance basis, and is supplemented by substantively fixing interest rates for each forthcoming regulatory period at the time of the price control determination. This enables us to manage uncertainty in the approach to setting the cost of debt at each price review, and our approach to debt financing enables us to consistently lock in long-term debt at good relative value.
We adopt an asset-liability matching policy for our defined benefit pension schemes by investing in assets such as fixed income swaps, corporate bonds and gilts which perform in line with the liabilities so as to hedge against changes in swap and gilt yields. This therefore reduces the volatility of the required funding level.
The pension schemes also hedge inflation exposure, partly through RPI swaps and partly through an inflation funding mechanism, whereby company contributions are flexed for movements in RPI, providing a natural hedge against any inflationary uplift on the RCV.