If you were playing the back 9 at Augusta with a chance to win the Masters, you would want as many clubs in your bag as possible.
Your driver is handy to get off the tee but other clubs are needed to work your way around the course to shoot your best score. You may need a wedge to get out of a bunker or a recovery wood if your ball rolls into the rough.
Your caddy should have fully mapped out the course before teeing off. This plan can then be used to set realistic landing targets along the way and to guide your ball back onto the fairway if a shot ever goes astray. Bad bounces or ‘sudden gust of wind’ are never planned for!
In a similar way, a pension scheme should use all the tools available to reach full-funding. Investing purely in equities is equivalent to using your driver every shot – the club hits the ball a long way just as equities provide the biggest potential returns, but with far higher risk if your driver/equities are underperforming.
Liability Driven Investment (LDI) provides trustees with extra clubs in the bag. Swaps may act as your putter, allowing for additional accuracy to hit your (funding) target. The range of bonds available can be seen as your set of irons. Synthetic equity are reflective of a rescue club, a more recent invention to get you out of a troubled spot – for example, by selling cash equities and replicating with derivatives to free-up cash.
Your consultant should have mapped realistic trigger points before implementation, helping to deal with funding level fluctuations in order to get you back on your flight path. Equity falls or a drop in real yields are never expected!
You do not see many golfers playing with wooden clubs nowadays - using the latest technology is far more likely to lower your score. Similarly, many pension schemes can access the latest financial products to improve their funding score and reduce the risk of the scheme going out-of-bounds. And landing in the PPF.
[Please note that all opinions expressed in this blog are the author’s own and do not constitute investment advice. Click here for full disclaimer]