Static asset allocation risky for schemes says AXA

UK pension funds using traditional, static approaches to asset allocation with an average 60% allocation to equity could be bearing a one in four risk of a 10% plus fall in solvency, according to research published by AXA Investment managers and Edinburgh-base risk consultant Barrie & Hibbert.

The report also argues that for a typical UK plan with 60% invested in equity there is an 11% probability that solvency would fall by more than 20% over the next three years if the plan kept the same allocation of equity exposure.

The findings are contained within AXA IM’s latest report “Strategies with Upside: Increasing solvency while limiting downside”, which focuses on solutions of interest to marginally under-funded schemes looking to enhance returns while limiting the risk of significantly aggravating their deficit.

The report considers whether UK schemes should make use of strategies designed to manage downside risk, such as Dynamic Contingent Immunisation (DCI) and Portable Alpha.

Looking at the DB schemes of the top 350 companies in the UK, the survey claims that, on average, schemes implementing a simple DCI strategy would have a funding level 17% higher than their present position and, secondly, that a liability-matched Portable Alpha strategy would have enhanced surpluses by an average of 60%.

Joanna Munro, head of UK institutional business development and head of global consultant relations at AXA IM said:
“For under-funded schemes, it makes sense to implement strategies that have significant upside potential but these have to be implemented in a risk-controlled manner. Our analysis shows that for the UK’s top 350 DB schemes, strategies with upside would have clearly benefited most of the schemes both in terms of final solvency and the volatility of that solvency over that period. It is important to remember that in order to be implemented successfully, these strategies must be fine-tuned to meet the pension schemes’ specific needs and objectives.”

AXA IM says the research was commissioned in response to the changing landscape facing UK pension funds by eschewing the ‘one size fits all’ approach and highlighting the need for a robust link between a scheme’s investment strategy and its characteristics.

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