Five steps to building a simple flight path for smaller pension schemes
In 2013, the majority of UK pension schemes find themselves with a deficit hole to fill. Most UK pension scheme trustees and corporate sponsors are relying on investment returns and favourable market conditions to help them do this.
In 2013, the majority of UK pension schemes find themselves with a deficit hole to fill. Most UK pension scheme trustees and corporate sponsors are relying on investment returns and favourable market conditions to help them do this. But when is the right time to consolidate increases in the assets or falls in the liabilities? A flight pathi ensures decisions to de-risk are taken when it is most beneficial to do so.
Mark Humphreys, Head of UK Strategic Solutions, Schroders explains:
“With the development of pooled fund solutions and simpler de-risking frameworks, flight paths are now accessible to pension schemes of all sizes. There has never been a better time for pension scheme trustees to consider implementing their own flight path. We have put together five key steps which we believe can help trustees avoid information overload and indecision.”
1. What is the objective?
The starting point for any flight path is the long-term objective: to be fully funded on a low risk basis. Ensure that the basis is a good match to the end objective – whether buyout or self-sufficiency.
2. How are you going to get there?
The funding level is the most important measure of success. Your flight path triggers should be focused around a funding level target, looking to reduce the two largest risks for pension schemes – growth asset risk and liability risk.
3. Match the design to your governance budget
Asset allocation drives approximately 85%ii or more of returns. Focus on getting this right first, before spending your time and governance budget on manager selection.
4. Consider the balance between return generation and de-risking
Protecting against liability risk doesn’t mean sacrificing return. For smaller schemes, pooled liability matching funds can be used to increase flexibility and retain more assets in the growth allocation, if needed, while still allowing the liability match to be tailored to the scheme.
5. Choose your growth engine
Using a diversified mix of growth assets could generate your required return with lower risk than an undiversified portfolio. These need to be carefully selected or consider delegating this to a diversified growth asset manager.
For more information on flight paths for smaller pension schemes please contact our UK Strategic Solutions team www.schroders.com/ukstrategicsolutions
i Flight paths are tailored asset allocation frameworks used to de-risk pension schemes’ assets over time. Triggers (for example based on funding level improvements) are used to implement a change to the asset allocation. This might mean reducing the allocation to return generating or growth type assets. Alongside this, Liability Driven Investment (LDI) solutions are used to reduce the impact of liability risk. These frameworks are sometimes referred to as de-risking plans, flight plans or journey plans.
ii The Importance of Asset Allocation, Roger G. Ibbotson, Financial Analysts Journal, Number 2 2010 Determinants of Portfolio Performance (1986) Determinants of Portfolio Performance II: An Update, Gary P. Brinson (1991)
For further information, please contact:
Estelle Bibby, European Institutional
Tel: +44 (0)20 7658 3431 / email@example.com / +44 (0)7770 496163
Kathryn Sutton, International
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Schroders is a global asset management company with £256.7 billion (EUR307.2 billion/$415.8 billion)* under management as at 30 September 2013. Our clients are major financial institutions including pension funds, banks and insurance companies, local and public authorities, governments, charities, high net worth individuals and retail investors.
With one of the largest networks of offices of any dedicated asset management company, we operate from 34 offices in 27 countries across Europe, the Americas, Asia and the Middle East. Schroders has developed under stable ownership for over 200 years and long-term thinking governs our approach to investing, building client relationships and growing our business.
Further information about Schroders can be found at www.schroders.com.