Managing risks
Investment strategy
Most de-risking strategies involve a switch of assets from return-seeking assets to those which provide a better match for the liabilities.
Derivatives may also be used for risk management.
Sponsor covenant
Beneficiaries of DB schemes are exposed to the risk that the sponsoring employer becomes insolvent and the trustees are unable to recover from the employer sufficient funds to secure the benefits.
this could be mitigated by:
reviewing the investment strategy and the funding basis
obtaining guarantees
contingent assets
investing in assets that pay out on sponsor default
agreeing ratchets and/or contingent contributions
Financing
The sponsor and/or trustees may revise their financing strategy if there is a change in the risk inherent in benefit provision or their attitude to that risk.
In particular, if there is an increase in the risk of not being able to meet the scheme benefits a more prudent approach to funding may be undertaken or non-cash or contingent assets may be able to be used.
Options
Option terms can be set in order to mitigate risk, for example reducing transfer values
Similarly consent requirements can be introduced in order that options can be refused if they increase risk unacceptably.
Incentive exercises could be used to reduce risk
Insurance
Insurance products can be used to fully or partially remove risks from a scheme
these substitute covenant risk for counterparty risk and introduce the possibility of reputational risk if members face unfavourable experiences and subsequently complain.
Benefit design
Subject to any restrictions, it may be possible to amend benefits in order to manage risk.
For example, a fundamental change may be to offer a DC pension scheme for future service, whilst retaining DB accrued rights. Other risk-sharing benefit schemes could be used.