Wed, 27/11/2013 - 10:09
Most UK pension scheme trustees and corporate sponsors are relying on investment returns and favourable market conditions to help them fill their deficit holes.
But when is the right time to consolidate increases in the assets or falls in the liabilities?
A ‘flight path’ ensures decisions to de-risk are taken when it is most beneficial to do so.
Mark Humphreys, head of UK strategic solutions, Schroders says: “With the development of pooled fund solutions and simpler de-risking frameworks, flight paths are now accessible to pension schemes of all sizes. There has never been a better time for pension scheme trustees to consider implementing their own flight path. We have put together five key steps which we believe can help trustees avoid information overload and indecision.”
1. What is the objective?
The starting point for any flight path is the long-term objective: to be fully funded on a low risk basis. Ensure that the basis is a good match to the end objective – whether buyout or self-sufficiency.
2. How are you going to get there?
The funding level is the most important measure of success. Your flight path triggers should be focused around a funding level target, looking to reduce the two largest risks for pension schemes – growth asset risk and liability risk.
3. Match the design to your governance budget
Asset allocation drives approximately 85%[ii] or more of returns. Focus on getting this right first, before spending your time and governance budget on manager selection.
4. Consider the balance between return generation and de-risking
Protecting against liability risk doesn’t mean sacrificing return. For smaller schemes, pooled liability matching funds can be used to increase flexibility and retain more assets in the growth allocation, if needed, while still allowing the liability match to be tailored to the scheme.
5. Choose your growth engine
Using a diversified mix of growth assets could generate your required return with lower risk than an undiversified portfolio. These need to be carefully selected or consider delegating this to a diversified growth asset manager.
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