Schroders Shares Top 10 Tips for De-Risking

Date: Friday, February 24, 2012
Author: Brian Bollen's Blog

Schroders’ UK Strategic Solutions Team, led by Mark Humphreys, shares its Top 10 Tips for successful de-risking

1.            Start with the end in mind: What is the goal of your de-risking plan? A buy-out of the liabilities? Or to achieve self-sufficiency (where the scheme is run on a low risk basis with no additional contributions required)?

2.            Look to take ‘rewarded’ risks: Some risks are rewarded with higher expected returns (e.g. equity risk) and some generally are not (e.g. liability risks). Schemes should focus on reducing unrewarded risks.

3.            Protecting against liability risk doesn’t mean giving up growth: There are a range of liability-driven investment (LDI) strategies that can free up assets to invest in return-seeking strategies.


4.            Funding level comes first: Only take risk when you need the reward. As funding levels improve, downside protection is more of a priority than chasing further rewards.

5.            Use the right de-risking tools: 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?

6.            Prioritise: Tackle larger risks (such as equity or interest rate risk) before those with a less immediate impact (e.g. longevity risk).

7.            Governance is key: A de-risking strategy should enhance a scheme’s governance structure and provide a framework for effective decision-making.

8.            Sponsor involvement: The best de-risking plans are a coalition between the corporate sponsor and the pension scheme trustees.

9.            Focus on partnership: This lets the pension scheme benefit from a: independent oversight and b: timely monitoring and market expertise from their fund manager.

10.          Don’t assume you are too small: Cost-effective de-risking solutions are increasingly available to smaller pension schemes. These allow all schemes to access a range of tools previously used only by the larger schemes.

Mark Humphreys, head of UK strategic solutions comments: “It’s important to understand the de-risking goals of your Defined Benefit (DB) 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.”