Continual market monitoring vital for successful hedging, says ClearPath
LONDON - Pension funds need to monitor the risk-management product market continually and speed up their decision-making if they are to run successful hedging programmes, according to a recent study from ClearPath Analysis.
The warning was given by Dermot Courtier, secretary at Kingfisher Pensions Trustee, in an interview with ClearPath Analysis and included in the study, entitled Buy-ins and Buy-outs for Pension Schemes.
The study includes case studies of seven UK pension funds that have considered transacting a buy-in or buy-out.
In 2006, Kingfisher started a do-it-yourself programme of separate hedges against interest rate and inflation risk, as well as equity currency exposure.
"Our experience has been very positive in terms of the timing and performance of those hedging programmes," Courtier said.
"However, we are aware there have been significant developments with new organisations coming into the market place with more structured solutions.
"Over the next 12 to 18 months, it's business as usual in terms of what's been hedged to date, and continually monitoring to make sure those programmes continue to be fit for purpose.
"Equally we need to be open-minded about new products coming onto the market and reviewing them to ensure they can give additional benefits to the scheme going forward."
The scheme runs an education programme to keep the trustees up-to-date in terms of the make-up of these financial instruments and how they are expected to work in the market, as well as market developments.
"One has to accelerate one's decision-making to make sure you're agile enough to deal with the market conditions that prevail at any one time," Courtier said.
Michael McDonagh, pensions manager at PD Pension Plan, also highlighted the issue of pricing accuracy for buyouts in the survey.
"The more variables and concerns you can remove or reduce will improve the price certainty, and hence you will obtain the best value," McDonagh said.
As a preamble to its own buyout, PD Pension Plan checked its members' home addresses, not only to keep them informed but also to provide more certainty in the buyout pricing, as post codes are used in the mortality calculation.
The scheme also carried out existence checks, to ensure the correct pension was being paid to the correct person.
This not only showed it was actively managing its liabilities but was a deterrent against fraud, it said.
Rather than send all members a letter, the scheme used a checking process provided by the National Audit Office, although McDonagh said there were also companies providing similar services.
He said trustees should consider carrying out a data audit of their scheme.
"Schemes with a history of mergers and acquisitions may have inherited data they know to be incomplete or suspect," he said.
"It is important at the price-quotation stage that the buyout counterparty has been given a complete set of membership data and scheme entitlements.
"If you have provided all the benefit details of the scheme, it will make the task of pricing easier and may lead to a more competitive quote."