UK pension schemes need to be more proactive in managing their investment risk, according to Gwion Moore, Head of Investment Strategy at Mn Services Investment Management UK.
Speaking to Global Custodian.com, Moore explained that many pension schemes still take the view that they are long-term investors. As a result, they set a static investment strategy and are willing to ride the ups and downs of the market.
While this relaxed approach to risk management may have been acceptable in the past, most pension schemes are now closed and critically underfunded. The long-term is therefore getting shorter and net contributions are falling quickly. The ability of pension schemes to meet the pension promise to their members therefore increasingly hinge on investment returns relative to liabilities.
This calls for a much more pro-active risk management of risks. Pension schemes must ask themselves the what if questions, position their portfolio to minimise downside risk and take advantage of opportunities in these scenarios, and put in place action plans to respond to each possible scenario. For example, what actions will be taken if a 1990s Japan-like deflation scenario or a 1970s US-like stagflation scenario unfolds?
Risk management must be much more dynamic than static asset allocation and liability matching strategies. Pension schemes should ensure that they have the governance structure in place to continuously scan the financial-economic environment to identify emerging opportunities and threats and then prepare and respond to these scenarios in a pro-active, timely manner.