In response to a growing demand for alternatives to buy-outs, which are less feasible in the current uncertain market, Mercer has developed a more flexible solution.

The financial consultant aims to address current widespread concern from trustees about the funding issues impacting on their defined benefit (DB) pension schemes.

Bruce Rigby, chief retirement strategist at Mercer, said: "Most pension governance arrangements are unable to respond quickly enough to changing economic conditions, so schemes often fail to lock in favourable movements in the market."

One of the issues Mercer has picked up on in building its new offering is that existing UK structures have a very slow reaction time to changes in the markets and mitigation of risks, with trustee board meetings typically held every three to six months.

The new Mercer Dynamic De-Risking Solution (MDDS) will use a proprietary tool to calculate an expected funding path and recommend a series of funding level bands that allow for growth and protection allocations, within agreed parameters of funding target, timing and risk tolerances. Mercer will monitor the funding level daily, so that, if it crosses a band, pre-agreed investment changes are set in motion.

Rigby added: "We've invested heavily in technology, expertise and robust control processes to deliver this facility which will provide a firm platform for those organisations which want to actively manage their funding arrangements and underlying investment strategies. We expect it to transform the way schemes develop and manage their risk reduction plans for the benefit of companies, trustees and their members."

Alan Baker, chief operating officer for MDDS, voiced his belief that a delegated solution is necessary at the moment and there has been strong demand for it, adding: "the research we've conducted shows company and trustee reactions are very positive about this approach to risk control."

The key features that will enable trustees to be more proactive in banking investment gains and limiting potential losses from market fluctuations include daily funding level monitoring, a rules-based approach to locking in market gains, an integrated liability hedging strategy, and measures to mitigate downside equity risk.

- Pensions Age June 2009

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