De-risking has been a big theme in UK pensions over the last decade, but have schemes done it in the most effective way? And has it left them on track to close deficits and be fully funded?
Find out here.
This paper is the result of cooperation between Redington and Societe Generale’ Cross-Asset Solutions teams.
- Show that equity risk is likely to be one of the major risks faced by a UK DB pension fund this year.
- Provide a framework for defining what extreme equity risk means, and describe why this might be a problem for pension funds.
- Define and describe a number of equity hedging strategies approaches, some of which involve trading in options and volatility derivatives.
- Articulate the possible objectives of an equity hedging strategy, and provide a framework for defining the properties of any strategy. The framework is based around three possibly competing objectives:
— The Hard Floor objective;
— The Volatility Smoothing objective; and
— The Tail Risk Hedging objective.
In May 2015 the UK reported its first year-on-year fall in the Consumer Price Index since the official CPI series began in 1996, with a -0.1% reading. Given pension schemes pay benefits that generally cannot fall from one year to the next, but often hedge with assets that can, we feel it’s relevant to ask the question: should pension schemes fear deflation?
Find out here.
Robin Claessens joined IPS at the end of 2008, and accepted the mandate as their CEO and CIO (CIO for 2 years only). Today, Robin is a Managing Director in the Investment Consulting team at Redington.
During the journey at IPS, he experienced a number of events, some professional and technical, some more subjective and others personal. Robin has endeavoured through this paper to translate these events into 14 lessons he has learnt and which he thinks apt to share with you.
The lessons are split into four categories:
- Management and Strategy
- Infrastructure and Operations
- Management of Stakeholder and Third-Party Service Provider
- Leadership and Personal Lessons
In this edition of RedViews, Dan Mikulskis, co-Head of ALM, assesses the implications on capital requirements from the recent change in banking regulation.
- Situation - A recent change to banking regulation brings pension risk to the fore.
- Problem - Allowing for equity risk at 99.5% 1-year risk level means reserving against quite extreme shocks.
- Implication - Additional capital requirement for banks and other financial institutions, which can be lessened by capital protected equity strategies.
- Need - Using a volatility controlled benchmark greatly reduces the cost of protecting an equity portfolio against large losses, while maintaining return expectations similar to a conventional equity portfolio.
In this edition of RedViews, Sebastian Schulze, VP Investment Consulting, discusses the Bank of England's announcement of forward guidance for its future monetary policy.
- The Bank of England (BoE) has provided details on ‘forward guidance’ for its future monetary policy, spelling out the economic conditions under which it would consider raising its benchmark interest rates from the current record low of 0.5%.
- The BoE said that the official unemployment rate must fall below a ‘threshold’ of 7% before it would consider increasing benchmark interest rates. The Bank stressed that this does not represent a trigger for raising rates automatically.
- The BoE has also set out conditions under which this threshold level would cease to apply as a guide for monetary policy, in particular inflation being too far away from the target level. This permits policymakers to remain true to their primary objective (price stability).
- The BoE may engage in further quantitative easing as long as the unemployment rate is higher than 7% if the Monetary Policy Committee thinks this is necessary to support the recovery.
In this edition of RedViews, Mathias Rasmussen and Alex Lindeberg, both Associates Investment Consulting, assess the impact of three extreme economic scenarios on a hypothetical pension scheme (Scheme XYZ), using two different asset allocations and hedging strategies.
- Stagflation: A dire scenario for Scheme XYZ as falling real yields drive up the value of liabilities while return-seeking assets underperform, reducing the funding ratio by a tenth. A more efficient asset allocation effectively neutralises this loss.
- Hyperinflation: Ironically, the most benign of the three scenarios for Scheme XYZ as higher nominal rates devalue liabilities and return-seeking assets perform strongly in nominal (though not real) terms, with the funding ratio more than doubling.
- Deflation: The worst scenario for Scheme XYZ as return-seeking assets plunge and the impact of falling inflation on liabilities is largely offset by falling nominal rates, taking the funding ratio down by 17%. With diversification into alternative assets, this blow is reduced to only 6%.