Pension Scheme Investment

Pension schemes are a special case as far as investment is concerned.

The assets of a pension scheme are there to meet fairly specific liabilities. Obtaining the highest return is not the only issue.

Risk control is also a major issue as it  is one of the issues looked at by the regulator and in any even it impacts on the company's accounts.

A one size fits all managed fund approach is no longer acceptable. The investment strategy at all times needs to be mindful of the structure of the liabilities. An investment strategy which produces a portfolio exactly matching the liabilities may not be the optimum strategy and in many cases it is not possible. However, the trustees still need to be aware of what a matching portfolio would look like, why such a portfolio is not possible or not desirable and how far they are deviating from it.

Increasingly funds can get structured products with a view to reducing some of their risks while introducing other risks such as counterparty risks. It can no longer be taken as read that the banks who provide these products will remain solvent within the timeframes envisaged.  These products are likely to become increasingly expensive in the short term as, not only have markets fallen, but the level of volatility has increased dramatically. Movements in the FTSE 100 Index of 10% used to represent a major change but recently movements of that size have been seen in a single day.

Trustees and Employers also have the option of buying out part of their liabilities with insurance vehicles set up to provide this service. In some cases the whole liability can be effectively bought out, but at a price.

Investment advice for pension schemes these days requires not only a knowledge of investment markets but also an intimate understanding of the liabilities of the particular scheme, and this requires actuarial expertise as well as investment knowledge.