An optimal investment strategy will maintain the
You need risk before you can de-risk
expected outperformance from rewarded risk whilst
mitigating this as much as possible through
The asset-liability mismatch is a risk that must be
diversification. It will also remove unrewarded risk
acknowledged, accepted and managed. The current
through leveraged hedges where it is possible to do
‘total return’ approach was successful, in large part
so cost effectively and when market conditions
due to recent equity performance and the steep
appear favourable.
depreciation of the Canadian dollar. De-risking
advocates will argue that given the current improving
Be deliberate about taking risk. Be deliberate about
funding status, it appears prudent to initiate a
de-risking
transition to a portfolio that better tracks the
performance of liabilities. In other words, locking-in
The number of strategies available increases the
some of the success before it slips away.
likelihood that there is an approach that will work well
with an organization’s culture, risk tolerance, financial
However, a perceived key barrier to de-risking is the
goals and employee demographics.
opportunity cost of doing so. The fear is that plan
sponsors won’t benefit from a rise in interest rates and
The de-risking continuum includes:
will not participate in the stock market out
performance.
Reduction of interest rate risk: removing
unrewarded risk by investing in leveraged interest rate
The ability to capture capital market performance is
and inflation-linked assets.
not lost in the de-risking process. In fact, some derisking implementations show risk exposures that are
Yield enhancement: increasing allocation to credit
quite similar to the ubiquitous 60/40 portfolio.
risk and diversifying via non-traditional vehicles such
as real estate and infrastructure.
Growth asset diversification: reducing rewarded
risks through the optimal diversification of growth
LOCKING IN
asset classes, often via non-traditional strategies
Risk transfer: removing all pension risks by
YOUR SUCCESS
purchasing annuities (buyouts and buy-ins)
IS WHAT
Plan closure: ceasing the further accumulation of risk
by removing future accrual
DE-RISKING
Liability and policy management: removing
liabilities at cost-effective levels though transfer
values, lump sums and the reshaping of benefit
IS ALL ABOUT.
design.
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PROTEUS