DYNAMIC RISK MANAGEMENT – SMALL SCHEME WITH BIG RESULTS

The first few months of 2013 have delivered mixed results for pension schemes. While equities have delivered positive performance resulting in increased asset values, the dip in real yields and increase in liability values have more than offset those gains for most schemes.
 
The volatility in the markets has once again highlighted the importance of following a disciplined risk management approach to investments and to hedge un-rewarded risks.
 
For the pension scheme I mentioned in my last blog, the systematic action to increase its hedge ratio at the end of January following an improvement in its funding level has proved to be very timely. The scheme is now c15% better funded compared to where it would have been under its old investment strategy. Further over the same period, the scheme has more than halved its risk by adopting a clear risk management framework.
 

 
The impressive improvement in funding level and risk-adjusted returns for this scheme prove that dynamic risk management is not purely the preserve of larger pension schemes with extensive resources. With a robust risk management framework, a governance structure which allows for nimble decision-making and clear communication between all parties involved, schemes of all sizes have the ability to deliver these kinds of results.
 
Here is what the Chair of the Trustees and Founding Director of Inside Pensions, Rita Powell, has to say about the scheme’s strategy:
 
"Small schemes really can put in place sensible de-risking strategies, that actually deliver benefits all round, as we have proved for this Scheme. For me, the keys to success have been:
 
•       a good and complimentary skill set on the Board (50% of the Board has changed along the way)
 
•       a robust governance framework (one that includes structure but also recognises that  decisions need to be made quickly and robustly)
 
•       working as a team, with the investment consultant and the CFO (we have had a change to the CFO along the way there too)
 
•       an investment consultant who really understood, provided innovation and worked closely with us

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
 

 

Author: Neha Bhargava

Prior to joining Redington in 2009, Neha worked at Merrill Lynch, London with the Rates Structuring group and at Merrill Lynch, Hong Kong with the Securitization group. She holds an MBA from the Indian Institute of Management, Ahmedabad (IIMA) and a BA (Hons) in Mathematics from St. Stephens College, Delhi University. Neha currently works in the investment consulting team on a number of trustee and sponsor-side appointments spanning the breadth of Redington’s client base.