Tom Nimmo discusses a new Investment Risk Management module and how it has 'seriously improved upon the inadequacies of previous technologies', allowing pension scheme trustees and sponsors to actively monitor their schemes' funding strategies.

Last summer I wrote a long and rambling blog about Don Quixote and annual funding statements, with a specific focus on the key principles outlined in the Code of practice no.3: Funding defined benefits, from the Pensions Regulator.

I wrote the blog because I believed that most of the available technology, allowing pension scheme trustees and sponsors to actively monitor their schemes' funding strategies was inadequate.

By inadequate, I meant that the systems available didn't really support the needs of the schemes, or they were beyond their budgetary means.

I knew at the time that the development team for our own system, Mantle?, were working on a new Investment Risk Management module. However, I didn't know that with the release of the Investment Risk Management module in October last year, Mantle was about to seriously improve upon the inadequacies that I had been talking about.

Looking back on the Code of practice no.3, I think that I could now summarise its general sentiment in a single sentence: Ensure that the funding decisions made today will meet the funding objectives of the scheme in the future, despite uncertainty.

Of course this single sentence belies a mountain of complex issues.

The process of meeting funding objectives is beset with pressures and constraints that can create conflicting priorities for both trustees and scheme sponsors when deciding upon appropriate goals and the best way of achieving them.

Adding uncertainty to this picture only complicates matters further, by muddying the waters of choosing the best strategy for achieving the scheme's funding goals.

Therefore, it is no surprise that addressing this uncertainty and understanding the potential risks and benefits associated with a given investment strategy presents one of the greatest challenges to pension schemes.

Asset liability modelling (ALM) software has sought to simplify the complex problem of pension scheme investment strategy selection.

However, the crucial factor of supporting the needs of the scheme is often lost due to an inability to provide relatable decision-making information to pension scheme trustees and sponsors.

Consultants can be quite protective over the details of how they produce their advice. When you consider that around 50% of UK pension schemes and up to 80% of all UK pension scheme assets are managed by the 'Big 3' consultancy firms, it is easy to see why investment advice is often criticised for being too generic.

Furthermore, the information often requires further interpretation in order to frame the analysis results in terms of the pension scheme's strategic funding objectives.

This can lead to a danger that the risks associated with a particular strategy and its suitability towards achieving a scheme's goals are misjudged.

So, the reason that I think Mantle's Investment Risk Management module seriously improves upon the inadequacies of other systems is that it places the scheme's specific strategic goals and needs at the heart of the analysis it performs.

The system's interface cuts through the oblique language of traditional ALM analysis by allowing the objectives of the trustee or sponsoring employer to be set out in plain English.

The strategic objectives form the success and failure criteria used to analyse the suitability of investment portfolios in 1,000 plausible future scenario simulations.

The model seeks out diverse portfolios that have the highest proportion of successful outcomes and allows the associated risks of the strategy to be reviewed in terms of the strategic objectives of the scheme.

Data integration with the administration and actuarial functionality of the system makes the analysis affordable for any size of scheme, offering the insight and control that schemes need in order to take charge of their destinies.

In short, it allows schemes, no matter their size, to take real control of their investment strategy and see their picture in the round.

Written by Tom Nimmo, Senior Business Analyst at Veratta