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Case study

Managing risk in a volatile market

Investment Pensions & benefits

How we helped our client to manage risk even as their circumstances changed. Effective risk management can help to maximise your returns without leaving your investments overly exposed to volatile markets.

The background

Arising from a number of years of strong investment returns relative to liabilities, the Trustees of a DB scheme found their investment risks were in excess of that which was required to reasonably meet all future funding measures.

We were asked to advise on how to sensibly reduce the investment risks both now, and in the future. The proposed strategy was cognisant of current investment market conditions and the projected movement in future funding levels including on a going concern, minimum funding standard plus risk reserve and accounting basis. 

Our solution

Initially, we modelled the DB Scheme using our LCP Visualise software on a basis consistent with the Scheme Actuary and then undertook some interactive workshop sessions to fully develop a shared understanding of the trustees and sponsoring employer investment views. We highlighted the potential impacts of a number of the key investment risks the Scheme was facing, including distinguishing between rewarded and unrewarded risks.

Some of the key aspects of the risk management were:

  • Establishing common goals – between the trustees and sponsoring employer, to ensure the best solution for the future sustainability of the DB Scheme and its members was reached and that the potential impact of the key risks was fully understood by all stakeholders.
  • In depth training on complex investment solutions – a bespoke education process was delivered to enable the Trustees become more comfortable with the different aspects of various investment solutions including, Liability Driven Investment strategies, alternative asset classes and cashflow matching funds.
  • Allowing for the future evolution of  alternative liability measures – tailoring the investment solution to face the twin challenge faced by Irish DB schemes of meeting both the ongoing and MFS funding measures which can evolve in quite different manners and have quite different levels of interest rate sensitivities dependent on the maturity profile of the DB scheme.  
  • Illiquid and real assets – accessing alternative markets to help reduce direct equity risk in the portfolio and seeking more stable investment returns through contracted cashflows.
  • Portfolio management – setting up a framework to manage capital calls in relation to LDI and other illiquid asset classes to maintain the Scheme’s intended exposure, meet investment deadlines and protect against inopportune market timing

The results

The scheme’s trustees now have an investment strategy with improved diversification and contracted income. This will help them meet their more clearly articulated long-term objectives with greater certainty, as well as having in place structures to help mitigate the key investment risks faced by the Scheme.