UK - Pension funds' investments should be liability-led to achieve optimum risk management, according to HSBC Actuaries and Consultants.
Speaking in front of the Society of Pension Consultants, Bobby Riddaway, senior investment consultant at HSBC Actuaries and Consultants said through the use of liability-led investment, additional risk could be taken to try to outperform a fund’s liabilities.
“But the difference or advantage is that the risks being taken become very explicit,” he said.
“Too many funds don’t use liability-led investment saying ‘we might do this if we had a surplus’. However, I still contend that this can be an affordable route, rather than waiting for an equity market bounce.”
Riddaway said cash-flow matching was an essential element of this type of investment.
“Basically funds doing this are aiming to produce income and capital proceeds from the assets that are of similar size and incidence to the expected payments to be made to pensioners,” he said.
“This is a concept that should be investigated by most, if not all schemes, rather than being put off by perceived costs, complexity or the dreaded ‘D’ word – derivatives.
“However, I do stress that liability-led investment is a concept that requires training and understanding, as it doesn’t remove all risks. It just manages them better.”
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