Setting investment strategy

 

Over the last few years, many schemes have been investigating use of alternative asset classes.

Setting investment strategy is the most important decision that trustees make. Our advice is focused on helping trustees understand the risk and rewards of potential strategies to arrive at the right mix of asset classes for their scheme's circumstances.

We use a straightforward roadmap which follows the four questions:

Strategy roadmap
What do you want to achieve? We start by helping you consider your objectives and those of other parties involved in the process.
Are you taking unnecessary risks? By considering the risks being run by the scheme, you can determine which ones you are happy with and which ones you would rather reduce.
Are you putting all your eggs in one basket? Once you have decided which risks to retain, we can help you decide how best to spread this risk between asset classes and managers.
How can this be implemented intelligently? Finally, the timing of the implementation of your chosen strategy can have a signfiicant effect. We can help you to implement it in a sensible way for example, using switching mechanisms based on market levels.

By navigating you through this roadmap, using interactive tools and clear communication, we will help you understand the "journey risk" - the risk of a significant deficit arising in the next few years, and the "destination risk" - the ultimate probability of meeting the benefit promise.

At the outset we educate clients about the nature of their scheme's future cash flows, and how the associated risks of meeting them can be managed. We will ensure that you understand your options and will give you a direct recommendation on the direction we think you should take.

Alternative asset classes include:

  • Diversified growth funds
  • Commodities
  • Infrastructure
  • Active currency management
  • Hedge funds

Diversifying into other asset classes like these can help make the investment strategy more efficient. It allows schemes to increase their expected returns for the same level of risk, or reduce risk without sacrificing expected returns.

Understanding the benefits

We work with our clients to give them a much greater understanding of these unfamiliar assets. We provide an objective opinion of the benefits and drawbacks. This includes timely advice on relative attractiveness and appropriate levels of investment.

Our LCP JAZZ tool allows trustees and sponsors to see hands-on how diversification can help their scheme. This enables them to confidently make informed decisions.

Liability driven investment

Liability Driven Investment ("LDI") is potentially useful in a range of circumstances. Its key attraction is that it has the potential to narrow the range of future investment outcomes. However, reducing the risk comes at a price: that of reducing potential returns. Using LDI makes assets and liabilities track each other over time. It does this by matching the future cash coming from bonds with the future cash needed by the pension scheme. It also reduces volatility.

LDI 1

Scheme's expected cash flows (green bars) show differing levels as membership falls.

Long dated government bonds show a mismatch between the scheme's cash flows(green line) and bond payouts (red bars).

ldi2

LDI 3

A well designed LDI solution should aim to be practical and to help match a scheme's cash flows, so that any investment solution and the expected cash flows move in tandem.

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