Defined benefit (DB) schemes should strengthen their governance in order to achieve a more risk-controlled and cost-effective path towards full funding, BlackRock has said.

It's latest research paper, Investment Insights – Mapping the Journey, highlights how de-risking offers schemes "significantly" better outcomes.

The paper also suggests that where schemes have already adopted a journey plan, which combines liability-driven investing (LDI) with strengthened scheme governance, they could benefit increasing their rate of de-risking as they progress towards their goal, rather than de-risking at a constant rate.

Trustees need to consider various portfolio choices regularly and sometimes simultaneously when they adopt a dynamic LDI approach, but the authors of the study found that this cannot happen without adapting governance structures.

According to BlackRock, effective governance should include a clear statement of beliefs, a holistic oversight of investment decisions, an awareness of the broad market environment, reporting that is aligned to the overall objective of the plan and an explicit agreement on appropriate levels of delegation.

One of the authors, BlackRock managing director Stuart Jarvis, said: "Companies and pension schemes are rightly focused on reaching full funding, but they should also ensure that appropriate governance underpins their approach. Planning ahead enables schemes to respond speedily to market changes and thereby produce much better outcomes for all parties.

"The good news is that practical solutions are at hand for those that do not have the necessary dedicated resource internally, whether it is bringing on board independent trustees or flexibly outsourcing the day-to-day investment management to an experienced partner."

First published 28.05.2013

monique_simpson@wilmington.co.uk