has declined. Across the spectrum there is less tolerance and less of an ability to withstand sustained market volatility than there ought to be. That is becoming a problem. Scott: There are several ways pension schemes are trying to tackle volatility. Liability driven investing (LDI) has been trying to remove interest rate and inflation risks. Everyone is still looking for that extra return from equities to get them through. If you are underfunded it’s a different situation. If you are not ready to buyout you have to take more risk and be subject to volatility. Structured equity can help ride out the bad times but not take so much advantage of the good times. These are the ideas that schemes are going through to cope with the fluctuations that are happening but a lot of it is education. The hardest thing about LDI was getting trustees to understand it. It was the same with structured equity. It is a good idea, but it might take a year or two to come in because people don’t understand it or don’t feel comfortable with it.


PI: How are you positioning your scheme to face any volatility that may lie ahead? Scott: It depends on where you are. If you are at maturity and almost at the buyout stage, then you are structuring it so that you can hand it over to an insurer. If you are about 95% there you don’t want to risk your funding level falling. Drewienkiewicz: It is an interesting challenge because as you get closer to buyout you sell more and more risk assets. An insurer is not going to want to take all your assets, particularly the higher risk and non-investment grade corporate ones, so you start to take them all down. It is like pushing out from the edge of a swimming pool. If you make it far enough to get to buyout, great, but if you don’t make it then you haven’t got any of your risk assets left. Scott: When a scheme has almost got to the end it doesn’t want to go back to 90% funded. Schemes have been closed to new members and winding down for 10 to 15 years, when deficits started coming in. So when you get within one length of the swimming pool left, people will sell on the understanding that it might cost them, but they cannot afford to go back a length.


10 April 2019 portfolio institutional roundtable: Managing volatility


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