20-20 Trustees are familiar with and understand the full spectrum of investment options that are at the disposal to pension schemes of all sizes. We are aware of the importance of market, demographic and cash flow risk. Additionally, the insight we get from implementing a range of investment solutions means that we can make quick decisions without the significant level of training and expensive detailed advice that Trustee Boards might otherwise need.
Making decisions around how to manage pension scheme assets are one of the important yet complicated decisions for a trustee. Decisions include setting a scheme’s investment strategy and how it should change over time, whether investment decisions should be delegated to a fiduciary manager and the level of risk the scheme is exposed to, given the level of support that can be expected from the sponsor.
Importantly, these decisions must tie into the risk appetite of the sponsor, the pension schemes end-game and time horizon over which the trustees would like to get there. Trustees need to get the balance of these decisions right (whilst collaborating closely with the sponsoring company) so that undue levels of cash aren’t drained from the business, whilst ensuring enough support is being provided to schemes in the context of a sponsor’s other creditors and shareholders.
Simply selecting a mix of equity and low risk bonds (such as gilts) and switching between these asset classes as members retire is unlikely to lead to an optimal position – indeed, detailed analysis would likely show that too much risk is being taken in the short term in exchange for unnecessarily low returns in the longer term. This usually leads to an inflated deficit, higher cash demands and significant short-term market and cash flow risks in the scheme, which aren’t being managed effectively.
In addition to these “traditional” strategies, all Trustees should be considering a range of options including rate derivatives that manage inflation and interest rate risks, equity derivatives that can protect the scheme in case of large equity market falls and strategies that match income to outgoings so that schemes are not forced sellers of more volatile assets at inopportune times.