DB trustees' investment risk appetite 'hampered' by knowledge and regulation concerns

Around 47 per cent of defined benefit (DB) trustees believe that their appetite for investment risk has increased since pre-pandemic, but a lack of knowledge and "onerous regulation" could be hampering investment decisions, according to industry research.

The survey from Charles Stanley Fiduciary Management found that around one in five (18 per cent) DB trustees had seen a "significant" increase in their investment appetite, whilst 14 per cent said that their appetite for investment risk overall had decreased.

However, there was concern that investment decisions were being hampered, as 40 per cent of DB trustees said that a lack of confidence in their investment knowledge was limiting their risk taking, while more than three quarters (78 per cent) stating that regulation is stifling their investment approach.

Indeed, the research revealed that despite emerging from a period of unparalleled market volatility, appetite for equity risk had risen amongst 49 per cent of trustees, with almost a quarter (22 per cent) stating that their appetite had increased “significantly”.

Appetite for interest rate risk also increased amongst 75 per cent of respondents, inflation risk amongst 73 per cent and credit risk amongst 60 per cent, which the firm highlighted as a suggestion that trustees’ strongest preference would be to increase through tactical under-hedging of their liabilities.

However, Charles Stanley Fiduciary Management clarified that these risk appetite levels are not mirrored in investment decisions, as only around a third (36 per cent) of DB trustees were more likely to increase equity exposure than compared to pre-pandemic.

Charles Stanley Fiduciary Management senior portfolio manager, Bob Campion, highlighted the findings as demonstration of "the trustees’ paradox", emphasising the need for trustees to lean on industry experts for support where their knowledge is lacking.

He said: "On the one hand trustees want to take more equity risk, but on the other hand they don’t plan to invest more in equities. Similarly, while they want to take interest rate risk, are they prepared to relax hedging constraints?

“What is clear is that trustees need expert help to assess risk, to understand what ‘risk budgeting’ means for a pension scheme and to decide from all the options available to them.

“Professional trustees shouldn’t feel as if they have to be investment experts – but they do need to work with dedicated experts they can trust. Deploying risk in the right way is a vital decision for any pension scheme.

“And while the results will only be known in hindsight, the good news is that trustees of any scheme now have access to dedicated experts and analysis to help craft the right strategy for their pension scheme by working with fiduciary managers like Charles Stanley.

“We believe in the merits of equity markets as a long-term driver of returns – and that under-hedging can add value where risk budgets allow, particularly for pension schemes with distant funding targets.

“By helping trustees to understand risk properly we routinely support our clients to set and achieve sensible long-term funding plans by balancing all the risks they run.”

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