Putting funding level first and ensuring sponsor involvement are among the best ways to achieve successful de-risking of a defined benefit pension scheme, according to Schroders.
The asset management company today set out its 'top 10 tips' to successful de-risking. These include:
- Starting with the end in mind - deciding what the goal of a de-risking plan is - either a buy-out of the liabilities or to achieve self-sufficiency;
- Looking to take 'rewarded' risks - some risks, such as equity risk, are rewarded with higher expected returns, some - such as liability risks - generally are not. Schroders said schemes should focus on reducing unrewarded risks;
- Protecting against liability risk doesn't mean giving up growth - there are a range of liability driven investment strategies that can free up assets to invest in return-seeking strategies, Schroders said;
- Funding level 'comes first' - schemes should only take risk when they need the reward, the company said. As funding levels improve, downside protection is more of a priority than chasing further rewards.
Other tips include using the right de-risking tools by examining issues such as whether liabilities are mainly foxed or inflation linked and whether the scheme funds on a gilts or swaps basis.
Schemes should also prioritise by tackling larger risks - such as equity or interest rate risk - before those with a less immediate impact, such as longevity risk, Schroders said.
And they should pay heed to the 'key' importance of governance. 'A de-risking strategy should enhance a scheme's governance structure and provide a framework for effective decision-making,' the company said.
Sponsor involvement was also highlighted, with the best de-risking plans described as a 'coalition' between the corporate sponsor and pension scheme trustees, while a focus on partnership can allow a scheme to benefit from independent oversight and timely monitoring and market expertise from their fund management, Schroders said.
Smaller schemes should not assume they are 'too small', Schroders said, with cost-effective de-risking solutions increasingly being made available to smaller pension schemes.
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. This certainly makes for interesting times in the DB pension industry.'