UK - The pensions crisis has seen a surging demand for risk budgeting by trustees, a leading consulting firm claims.
Watson Wyatt says trustees are being forced to look more closely and frequently at investment risk with the aim of quantifying risk more accurately and contextualising for the sponsoring company.
“Against the back drop of persistent volatility, a doubling of equity risk since 1997 and diminishing returns, Watson Wyatt is doing more risk budgeting work than ever before, having completed more than 50 for UK clients during the year,” the firm said.
Typically, a risk budget is drawn up and agreed by the plan sponsor, trustees and investment consultant forming the basis for consistent investment decisions.
Nick Horsfall, partner and senior investment consultant at Watson Wyatt said: “We anticipate plan sponsors getting increasingly involved in setting risk tolerances for their pension funds as they begin to appreciate their shared role in the spending of agreed risk budgets.
“There has been a positive response from clients, particularly plan sponsors, as it enables the company to quantify the potential balance sheet risk and then translate that into possible cash contribution requirements and funding levels.”
Watson Wyatt maintains its increased focus on risk is justified because it is “more accurate” to predict future risk levels than it is to predict returns.
“Historically there has been a disproportionate emphasis on investment returns, however usually the most important decision the plan sponsor and trustees can make is on the amount of risk to take in the fund,” Horsfall said.
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