The investment strategy of a pensions scheme impacts the volatility of the funding deficit and hence deficit contributions.
As part of our dynamic management of investment advice to companies we are constantly looking at market opportunities and innovative ways of adding value to companies’ portfolios.
Our views on capital markets are used to advise trustees on how to take advantage of market opportunities to enhance returns or to alter investment policies to avoid potential market bubbles. Examples include:
- Switching from equities to bonds in 2007 and reinvesting in equities in the first three months of 2009;
- Switching from swaps to gilts in 2008 to pick up additional yield;
- Increasing inflation hedging in late 2008, when inflation pricing fell briefly.
Our investment approach is a combination of working strategically and tactically with companies. We will initially work with the trustees to set a high level investment strategy. We also look to integrate real time views on markets to take advantage of market opportunities.
Liability Driven Investment
Liability Driven Investment (LDI) involves analysing benefit cashflows and finding assets that match these to reduce risk. We work with companies to decide whether LDI should form part of their pension scheme investment strategy, then assist with implementation.
Beyond investing in bonds to match the liabilities, there are a range of alternative assets which can be used to reduce the risks associated with a scheme’s liabilities. For example, derivatives can be used to hedge against the risks of mortality, inflation or interest rate assumptions not being borne out in practice.
LDI can reduce the volatility of future funding deficits, as well as increase the stability of cashflows. However, as it can be expensive to implement, we work closely with companies to ensure that LDI is an effective solution to the pension scheme.
Additionally, we are able to provide assurance services for pension schemes which include understanding of risk and control environment and testing the relevant systems and processes. These services can be provided jointly with existing internal audit resources or as an outsourced solution. Learn more about the extent and benefits of our pension assurance services.