We were appointed to advise a client with ~£400m of assets in 2015 and this case study sets out how we worked with the trustees and employer to ultimately reduce risk and increase expected returns while working towards an agreed objective.
"We worked with incumbent bond manager providing training, showing client-specific solutions and the likely cost impacts from making proposed changes."
At the start of our investment strategy review, we surveyed the Trustee Board and key employer contact on their long-term objectives for the scheme, investment beliefs and constraints. This identified a mutual objective to develop the strategy towards buy-out and that there was not a strong investment belief in the decision to have a significant unhedged level of interest rate risk unhedged. Our analysis showed that achieving a buy-out in the medium term was a realistic aspiration, even if yields remained at current low levels. It also showed the potential contribution risk to the Employer if rates were to fall further and also that the current hedging position could be materially improved without impacting on expected returns simply by leveraging existing gilt holdings. Although interest rate hedging had been raised by the previous consultant, neither the Trustees nor Employer had previously been persuaded of the case for a significant change.
We subsequently provided advice to target a higher level of hedging and then organised an investment committee meeting focused on Liability Driven Investment (LDI). Ahead of this meeting, we worked with incumbent bond manager to provided training including showing client-specific solutions and the likely cost impacts from making the changes proposed. The Employer and Trustees both agreed to make the proposed immediate changes and a phased further increase over time.
Subsequent to this, we have also carried out further work with the client in order to better diversify the return-seeking assets and establishing triggers for further de-risking of the plan via increases to hedging or sales of return-seeking assets respectively. The Trustees were ultimately satisfied to actually increase the targeted allocation to return-seeking assets due to the significant risk reduction which had been achieved.
The Trustees receive regular reporting on the performance of the strategy, the development of the funding level and the performance of the hedging program. The monitoring of the hedging triggers has been delegated to the LDI manager.