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Schemes explore de-risking strategies as DB membership falls sharply

22 May 2012

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A new industry report from Clear Path Analysis states that pension schemes are exploring de-risking strategies as DB membership falls sharply.

The report, based on contributions from F&C Investments, AXA Investment Managers, Standard Life Investments, Hermes BPK Partners and Lazard Asset Management, was carried out after ONS figures showed that the changing environment includes a dramatic fall in the active membership of private DB pension schemes (currently 9% compared to 34% in 1997), while 75% of providers are actively looking at moving their plan strategies towards one centred around taking risk off the table while still meeting long term liability projections.

Amid the uncertain economic environment and volatile markets, the rationale to explore risk-centred investment options is paramount, says the study, forcing many pension scheme providers to explore new and improved upon investment strategies that focus on de-risking.

The report, titled Pension De-Risking Investment Strategies Europe, has assessed the broad range of de-risking strategies now on the market, from long/short equity and liability-driven investing to new approaches such as absolute return funds and tail risk management.

Andrew Dickson, investment director UK Institutional Business at Standard Life Investments, said: "We have seen unprecedented amounts of volatility which has impacted traditional asset classes. Last year in August we saw one of the largest monthly declines in equities over the last 50 years, and in October the third largest gain; so clearly evidence of extreme volatility.

Dickson says there has been increased interest in absolute return funds in both DB and DC pension schemes because of market conditions and an uncertain economic backdrop looking at where future returns will come from. "Absolute return funds have a much broader universe of return opportunities."

Shiblee Alam, CAIA, director of AXA Funds of Hedge Funds at AXA Investment Managers, agrees with this, saying: "A systemic event does not unfold as an orderly cascade of dominos. It is like someone kicking the table on which the dominos rest. The 2008 meltdown reminds us that such extreme economic events happen more often than is generally perceived. For many investors, explicitly integrating tail hedge programmes as part of their asset allocation strategy will be a key factor in delivering stable and positive returns in the long term.

Correctly implemented, active tail risk hedging, through investment in a diversified portfolio of highly-specialised managers, may also extract alpha – not only by offsetting losses that result from market crashes, but by also enabling the overall portfolio to remain balanced throughout, and beyond, the crises."

The full report is available for download here.


First published 22.05.2012