Lack of knowledge prevents pension trustees from capitalising on post-pandemic investment opportunities
Professional trustees’ appetite for taking risk has increased since pre-pandemic, according to a new study of Professional DB Trustees, conducted by Charles Stanley Fiduciary Management.
Almost half (47 per cent) of professional DB trustees revealed that their appetite for investment risk overall has increased, with around one in five (18 per cent) saying that it has increased significantly. Just 14 per cent said it had reduced. But the research also found that they feel their investment decisions are hampered by onerous regulation and a lack of knowledge.
Professional Trustees want to take more risk across the board – in equities, credit markets and alternatives - as well as relaxing liability hedging. But burdensome regulation coupled with a lack of confidence in their investment knowledge mean it is unclear whether trustees have the freedom to enact their views.
Despite emerging from a period of unparalleled market volatility, the findings reveal that appetite for equity risk has risen among almost half (49 per cent), with almost a quarter (22 per cent) saying that their appetite has ‘increased significantly’. Appetite for interest rate risk has increased among 75 per cent, inflation risk 73 per cent, and credit risk 60 per cent. The findings suggest that trustees’ strongest preference would be to increase through tactical under-hedging of their liabilities - implying that they believe long-term interest rates are more likely to rise than fall.
However, this risk appetite is not mirrored in their investment decisions. For example, only around a third of professional DB trustees (36 per cent) are more likely to increase equity exposure than they were pre-pandemic. More than three quarters (78 per cent) of Professional DB Trustees think that regulation is stifling their investment approach.
Bob Campion, Senior Portfolio Manager, Charles Stanley Fiduciary Management, says: “These results reveal the trustees’ paradox. 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.”