Articles - Pension De-Risking Investment Strategies- Europe

 Amidst the low growth environment, persistent inflationary uncertainty and downside volatility pension scheme managers and trustees debate the optimum risk mitigation strategy. In the latest - Pension De-Risking Investment Strategies, Europe report, published by Clear Path Analysis, the role of de-risking, re-risking and right-risking is scrutinised as liabilities continue to rise despite the falling interest rates that they measure against.

 But what does de-risking really mean and are pension plans in danger of focusing too much on the short-term wins over long-term stability? This report draws together leading pension plan managers and their sponsors to answer:

 - How should the flight path be created and portfolio crafted to undertake the predicted risk horizon?
 - Could LDI ever be successfully introduced into the DC arena?
 - Is there really space to move from equities to bonds as part of a wider de-risking strategy?
 - Should trustees select a ‘one-stop’ solution provider?
 - What asset classes will win-out and how can investment ‘technology’ techniques be used for optimum returns?

 The surge of auto-enrolment has created an exponential expansion in the DC space and on navigating the plethora of options, Julian Lyne, Head of Global Consultants & UK Institutional, F&C Investments, comments that “the question is whether a DC scheme is there simply to facilitate a member saving enough to attain sufficient income in retirement, or whether it should be thought of as a platform to deliver a broad range of financial services.”

 Lyne stresses that whilst DC has handed more control to the consumer it “..only reinforces the need for governance, be it from a trustee or contract arrangement.”

 On managing the de-risking process and whether to choose a ‘one-stop’ solution, John Daly, Consultant Relationship Manager, Legal & General Investment Management, advises: “There are three key benefits to using a ‘one-stop’ solution provider.” He goes onto say that: “our experience is that when clients give a holistic oversight of the schemes assets to their largest provider they want to put in place a trigger monitoring strategy, such as funding level triggers, to execute the de-risking process.”

 When exploring alternative assets within the appropriate de-risking or right risking strategy Phil Clark, Head of Property Investment, Kames Capital, assess the value of property. He argues that positive attributes of property are often overlooked due to its “…heterogeneity, illiquidity, ‘lumpiness’, the needfor specialist management skills, high costs per transaction, and trading in private markets rather than centrally cleared markets.”

 However, Clark argues that in comparison with other asset classes such as bonds, “…property offers a similar contractual income stream where credit worthiness is important, but with the added security of ownership of a real asset in case of default.”

 Timing is crucial and according to Clark, the right time to allocate to property as part of a de-risking strategy is now, as: “a longstanding rule of thumb is that property should be around 2% above gilts in ‘normal’ market conditions. Currently the gap is around 5%.”

 As Richard Murray, Group Pensions Manager, First Group, outlines, setting a long-term objective is the key to success: “For example, a ‘self-sufficiency’ (ie low risk) objective might be measured by reference to a discount rate of ‘gilts plus [½%]’ and ‘buyout’ target (ie no risk) as ‘gilts minus [½%]”

 Murray sumps up “Shareholders are more alert to the fact that pension liabilities are a form of employer debt that ranks above shareholder equity and how greater risk around the funding status of a pension scheme can be expected to increase share price volatility and the cost of capital.”

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