UK - Pension schemes are abandoning "set and forget" investment strategies in favour of "anticipate and recalibrate" risk management frameworks.
Robert Gardner, chief executive at consultancy Redington, told an audience of actuaries yesterday that pension schemes' flight plans now comprised objectives that define the scheme's long-term strategy, and clear outcomes that define the target path of assets and liabilities.
He argued that, in the new era of risk management, favoured assets would be long term, with a high correlation to liabilities. They will also have contractual cash flows and a liquidity premium, deliver excess returns and offer upside gain potential, he said.
Within the new risk framework, growth asset classes such as equities, property and private equity will be less attractive - as will matching asset classes such as nominal gilts, index-linked gilts and swaps.
"Why invest in equities when you could invest in bonds?" asked Gardner, bucking the common wisdom that securities have outperformed bonds for more than 50 years outside the US, and questioning the size of equity risk premiums.
Instead, schemes will focus on flight plan-consistent assets such as long-term secured leases, social housing, commercial and equity release mortgages, ground rent and social and economic infrastructure.
Gardner said defined benefit pension schemes had ceased to be a problem for the long term because of their closure to new entrants and future accrual.
Rather, the increased recognition of deficit and contribution volatility to the corporate and public balance sheet has increased both regulation and the focus on risk management.
As a result, risk management has developed into "a market-consistent, transparent and actionable tool", he said.