PMI Crest
PMI
De-risking from a trustee perspective: can there ever be too much?
13 November 2020

De-risking from a trustee perspective: can there ever be too much?

“Stay at home. Protect the NHS. Save lives.” A familiar refrain from not so long ago. You may, quite reasonably, wonder what this has to do with pension scheme de-risking. But ‘lockdown’ was clearly a form of de-risking. Similarly, trustee boards have been exhorted to ‘De-risk. Protect the PPF. Save pensions.’

How quickly things change and, in pandemic terms, the longer term impact on the economy, on education, on early intervention screening and cancer treatments by the NHS, to name but a few, soon rose to the fore. A real short term/long term dichotomy, with life and death implications, requiring fine judgement and balance. So, is there a similar parallel to be drawn with pension scheme de-risking for those schemes with a long time horizon?

This thought piece, constrained as it is, considers two common examples in brief: pensioner buy-ins and a flight to bonds. In my analogy the former equates to full lock down (notionally for pensioners), providing, in theory, peace of mind for a proportion of the liabilities, but diluting the growth asset base in the process. This means the remaining assets have to work harder and generally for longer which increases the covenant risk. It can be perceived as mitigating the short-term funding risk but could damage the long-term outcome for the pension scheme in some cases. Say goodbye to herd immunity, in pandemic speak.

A flight to bonds might equate to partial lockdown of varying hues, depending on the bonds used - and there are many hues of both lockdown and bonds - but the principle of risk mitigation holds true. Leveraged liability-driven investment (LDI). In particular, may currently seem like the Holy Grail - and certainly no trustee adopting it in the last 10 years will have regretted doing so - but its pedestal position has undoubtedly been enhanced by events. I can hear the railing now: “it’s because of the uncertainty and unrewarded risks that leveraged LDI was put in place!” Quite so, but had that acknowledged uncertainty turned out differently, and whilst still fulfilling its objective, LDI’s status would not be so exalted. Even before the recent turbulence in investment markets there were some voices calling for a re-risking of scheme assets for those schemes with a long time horizon.

Just like with pandemics, short-term intervention may be crucial, and long-term outcomes may be uncertain and the true costs unknown. As with covid, we need to consider and balance both. Ignore any short-term protection and we risk cataclysmic failures; de-risk too assiduously without understanding the consequences and we may simply defer failure for another generation.

De-risking is an invaluable tool in the armoury and, like shades of lockdown, needs wielding with consideration and judgement on a caseby- case basis. The bad news? I see no vaccine on the horizon that protects vulnerable pension schemes.

Achieving accreditation is a statement of my intent; to the Trustee boards on which I sit, to scheme members, to sponsoring employers, to my fellow professionals in the pension community, to TPR and PPF. To myself. A strong advocate of good governance and lifelong learning, I see accreditation not as a finish line, but a welcome milepost on a campaign with livelihoods at stake.

Notes/Sources

This article was featured in Pensions Aspects magazine November/December edition.

back to Pensions Aspects Magazine

Last update: 27 November 2020

Phil Howden
Phil Howden
Pensions Rapport Ltd
FPMI, PTPMI

Trustee Services Administrator

Salary: £20000 - £30000 pa

Location: Leeds, West Yorkshire

Senior Pensions Administrator - DC

Salary: £26000 - £34000 pa

Location: Berkshire

Deputy Pensions Administration Manager

Salary: £30000 - £35000 pa

Location: West Midlands

You may also like:

Engaging with fund managers to deliver better ESG outcomes
05 March 2021

Engaging with fund managers to deliver better ESG outcomes

Voting and engagement are crucial aspects of responsible ownership and valuable tools for encouraging companies to adopt better standards of corporate governance and management of Environmental, Social and Governance (ESG) issues. Here, River and Mercantile’s Ajeet Manjrekar explains how fiduciary managers can support trustees to meet their regulatory obligations by challenging and influencing underlying fund managers’ behaviour and policies.

Read more
Reporting on Dalriada Trustees’ first year as a PRI signatory
05 March 2021

Reporting on Dalriada Trustees’ first year as a PRI signatory

Dalriada Trustees became a signatory to the United Nations Principles of Responsible Investment (PRI) in September 2019, the first Professional Trustee firm in the UK to do so. Over the last year or so we have been working to better incorporate Environmental, Social and Governance (ESG) factors both within how we undertake our role as trustee and in how we operate internally.

Read more