view around what they would be on the hook for if it goes wrong. Where you have a weak covenant it might make sense to take more risk while you know that the employer’s still around rather than sit out a long recovery plan. It is the combination of trying to close a big funding gap with a weak sponsor covenant that makes the volatility greater. Bart-Williams: I would go one step further. Ideally it would not just be a statistical measure of covenant risk. The correlation of that with pension scheme risk is useful to understand, e.g. the economic scenario that might cause your sponsor stress and hopefully making sure that that is not the same economic scenario that is causing pension scheme stress. Drewienkiewicz: That’s easy to say. In practice you are going to be investing in a lot of corporate busi- nesses, via equity or debt, and in all likelihood your sponsor is a corporate business. Bart-Williams: Yes, it is a corporate so general corporate risk is important, but there are also sector- specific risks. So you can’t do it with forensic accuracy but you can pursue a pragmatic approach and ask: “Is it oil prices that are going to cause my sponsor stress? How might that impact my pension scheme investments?” It is one of a number of measures that you should probably look at but it’s not a silver bullet. Scott: If a scheme has a risky covenant, the regulator is taking a much closer look at the investment strat- egy or the funding strategy because they don’t want the scheme going into the Pension Protection Fund.


April 2019 portfolio institutional roundtable: Managing volatility 15


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