Checklist for De-Risking

Before starting to derisk a portfolio, there are a number of factors to consider; Schroders has outlined the most important.

(February 23, 2012)  —  Prioritising larger risks and focusing on funding levels rather than returns are two of the key ways to effectively de-risk a pension portfolio, the United Kingdom’s largest listed asset manager has said.

Schroders, which manages over £182 billion in client assets, has listed 10 key points for investors to consider when looking to derisk their portfolio.

These started off by deciding at the outset on the endgame of their strategy– either entering into a buyout arrangement or continuing on a self-sufficiency basis until the final benefit payment is made.

Mark Humphreys, Head of UK Strategic Solutions at Schroders, said: “It’s important to understand the de-risking goals of your defined benefit pension scheme. Nowadays there are lots of risk management options available to help pension schemes of all sizes achieve these goals.”

Among other important considerations were managing or reducing unrewarded risks, such as liability risks, while exploiting those that are rewarded, such as equity risks.

Pension funds should only take risks when a reward is needed. Humphreys said: “As funding levels improve, downside protection is more of a priority than chasing further rewards.”

Also using the right de-risking tools from a large range was highlighted as fundamental to effective derisking. Humphreys asked: “Are your liabilities mainly fixed or inflation-linked? Does your scheme fund on a gilts or swaps basis? Could you benefit from diversification or equity protection in your growth assets? Which tools in the toolbox are the trustees willing to use?”

Tackling the larger risks that can have an immediate impact, such as equity or interest rate risk, should be a fund’s main priority, Humphreys said, before those with a less immediate impact, including longevity, or other long-term risks.

Finally, Humphreys said small funds should consider de-risking just as important as larger funds do.

For an in-depth look at derisking and liability-driven investment (LDI) see aiCIO’s dedicated issue here. 

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