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The Actuary The magazine of the Institute & Faculty of Actuaries

P-Solve calls for more active use of derivatives positions

Martin Johnson, investment director at P-Solve, has warned against trustees shying away from derivatives positions as part of the risk management of their pension schemes.

In an open letter in response to the collapse of Lehman’s, he said: “Trustees need to expect more from the investment advice they receive. Investment strategy must be reviewed more frequently, and long-term strategic decisions need to be supplemented with tactical adjustments to take advantage of changing market conditions. “Trustees should seek a more comprehensive service provision, from derivatives training, hedge design and assistance with legal documentation, through to trade implementation, active collateral management, position monitoring and reporting.”

Johnson calls on investment consultants to up their game saying: “In these uncertain times, trustees and corporate managers are seeking more than just the most appropriate advice. They are looking for an independent and objective market participant that understands their strategic goals, to whom they can delegate the implementation of that strategy, and who has the experience and standing in the market to ensure best execution, even in the most challenging of conditions.

He suggests that even those funds that had Lehman Brothers as a counterparty and have been able to replace their positions swiftly are in a better shape than funds that have not hedged their interest rate and inflation exposure at all.