Pension schemes should 'right risk', not de-risk, says JPMAM
GLOBAL - Instead of simply de-risking, pension funds should aim for the "right risk" and maintain their exposure to some risks such as equities, JP Morgan Asset Management (JPMAM) has claimed.
JPMAM said current financial turbulence could have a negative impact on both companies and their pension plans, creating other potential risks.
As a result, trustees and pension board members should adopt a "right-risking" approach, as this strategy can "combine appropriate interest rate hedging on the fixed income part of a plan with smart diversification in the return-producing assets".
Paul Sweeting, European head of strategy, said: "Companies and pension plans have differing views as to how to de-risk. Some look to purely de-risking their pension plans, while others seek to benefit from tax arbitrage opportunities, simultaneously reducing risk in their pension plans and increasing corporate levels of leverage."
However, the combination of low risk-free rates and high credit spreads means the opportunities for tax savings are limited.
"What's more," Sweeting added, "such exposure can raise risks for shareholders by increasing exposure to the company's profitability while losing the benefit of diversified returns in the pension plan."
JPMAM said total de-risking may not even be possible and highlighted that there were always some unhedgeable risks in pension plans.
It recommended pension schemes therefore adopt a strategy that involves hedging interest rate and inflation risks to the extent it is cost-effective.
In addition, pension plans should maintain exposure to risks with the prospect of commensurate rewards - such as equities - that are in line with the risk appetite of the plan.
According to JPMAM, such a strategy also allows schemes to benefit from investment in large, illiquid assets, something that almost no other investor can do.
Last month, another branch of JP Morgan, JP Morgan Securities Services, said it expected many UK pension funds to adopt re-risking strategies in the fourth quarter and increase equity exposure at a time when bond yields remain low.