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Impact Investing

IPE special report May 2018

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Schemes’ lack of derivatives expertise ‘an issue’

UK – One of the trustees behind the Friends Provident scheme’s move into derivatives in 2004 has warned that a lack of expertise could be an issue at other pension funds.

Graham Aslet, a former Friends actuary who stepped down as a trustee last year, explained how the life firm used in-house expertise to help the scheme assess swaps and options it contracted with Merrill Lynch last year.

The move received media coverage and was designed to reduce risk at the scheme, Aslet said. He said Friends, due to its experience in the field, believes it got a reasonable price on the deal.

“This will be an issue for other pension schemes that don’t have similar in-house skills,” he told a conference organised by F&C. Friends Provident owns 51% of F&C following the asset manager’s merger with ISIS last year.

He pointed out how difficult it would be for schemes sponsored by non-specialist firms to value all the aspects of the deal. Friends was advised by Towers Perrin.

Towers principal Mark Duke, who is actuary at the Friends scheme and leader of its UK actuarial practice, put it more bluntly: “I need to know if I’m being ripped off.”

Derivatives are moving up the agenda as risk management ideas become more mainstream at pension funds.

Aslet said detailed due diligence was needed for trustees to be able to approve the transaction. Derivatives now account for 10% of the scheme’s assets.

“The transaction has been a successful one for the pension fund because it has eliminated risks,” Aslet told delegates. “It has worked for the pension fund but it might not be appropriate for all schemes.”

Duke explained that the swap contract was a “symmetrical thing ands keeps you in balance”. He said: “It fills a hole. It protects you against changes in real yields.”

He said the impact of the derivatives contracts had been “profound” on the Friends scheme. The question now was whether the underlying asset mix was right going forward.

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