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.
This article was featured in Pensions Aspects magazine November/December edition.
Last update: 27 November 2020