DB schemes called on to consider alternative risk management options

Defined benefit (DB) pension scheme trustees should consider “interesting new directions and options” in managing downside risk, according to PTL client director, Dan Richards.

Richards explained that whilst diversification has been the traditional route to managing risk, there are other options such as the deployment of structured equity portfolios, which can make a potentially volatile growth asset class a closer match to the needs of a scheme.

He also noted that other real assets, such as commercial property and infrastructure, can provide good protection against the threat of inflation, although he warned that deciding to invest in illiquid requires “careful thought about the long-term direction of the scheme”.

However, Richards acknowledged that with so many different ideas and investment approaches in the market, it can be difficult for trustees to “keep on top of the options available to them”.

In light of this, he emphasised the importance of staying on top of the latest investment thinking, arguing that emerging ideas such as structure equity on portfolios, can give new ways of managing risk.

He also highlighted the need to make sure all stakeholders are comfortable with the approach to risk, explaining that trustees, sponsors and other stakeholders need to be confident in the strategy.

“In exceptional circumstances there can be a mismatch between sponsor and trustee expectations: for example, trustees may be put under pressure by the employer to take more risk than they feel comfortable with, in order to reduce scheme deficits,” he said.

“In these cases, agreeing the long-term goals for both the sponsor and the scheme is often the route to arriving at an investment strategy agreeable to all.”

In addition to this, Richards encouraged trustees to plan for the long term, highlighting the scheme endgame as a “major consideration” for both trustees and sponsors that will help to shape future investment plans both in terms of growth and downside protection.

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