Medium sized DC pension scheme
As many plans are closing and entering the final stage, the emphasis has turned away from providing the best possible benefits at the lowest possible cost. Now, the focus is on identifying, managing and mitigating the plan’s financial risks.
While there are many ways to remove risk, some options are a lot more effective than others. The right strategy depends on factors such as membership profile, funding level and plan size. To choose the most appropriate risk management strategy, the long term objectives need to be agreed – in conjunction with the sponsor.
Over the medium term, an effective strategy can reduce the level of risk within any pension plan by more than 50%. This makes planning, funding and overall management more predictable and less volatile – outcomes that are critical to any business where the pension liabilities are large compared to the net assets of the sponsor.
While Investment Risk represents the single largest short term risk, the impact of changes to yields on Government Bonds – and its impact on the liabilities – can have a much greater effect on the funding position than the short term performance of growth assets. That’s why we recommend regular monitoring as well as a detailed risk reduction plan, so that Investment Risk can be systemically reduced as the funding position improves.