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Pension Plan Risk Management – it’s about marginal gains

Most of us were enthralled by the Olympics last summer.  It was a great event for the GB cycling team which won seven viral 98gold medals on the track while the rest of the world won just three.  They credited their success to close study of every area that could impact on performance – and looking for marginal gains in all of them.  In fact, the cycling team even had a head of Marginal Gains, sports scientist, Matt Parker.  So in pension plan risk management how do we do the same?


Pensions have recently been suffering from economic headwinds which proved challenging for those managing pension plan deficits.  In particular, 2013 valuations are likely to be affected by the low-gilt yield environment.  Some might argue that ‘smoothing’ is the aerodynamic answer. However I disagree, as I do not think smoothing will get a scheme to its destination any faster.


Cyclists have known for years that warming-up is a critical part of performing well.  To ensure its effectiveness they came up with a new way to warm-up and to stay warm; heated cycle-shorts – ‘hot-pants’.  For pensions we know that assets that are a good match to liabilities are an important feature of risk or liability management, but can we achieve ‘better bonds’ that give a small performance kick too – for example by taking advantage of illiquidity premiums?

Remove the dirt

The cyclists found spraying alcohol onto the wheels removed dirt and improved traction.  Good pension plan risk management also starts with a spring clean.  Is your data clean?  I do not just mean meeting the Pension Regulator’s target for common data, although this is a good start.  Can you also fully describe your benefits, including having computerised records for future contingent spouses’ benefits?  You need this sort of traction if you want to undertake liability management exercises such as a pension increase exchange or longevity hedging in a cost effective way.

Bradley Wiggins’ sideburns

There is not only one right flight path that all pension plans should be following.  They also have to recognise the individual nature of their pension plans and their sponsoring companies.  All pension plans have the same goal of paying members’ benefits when they fall due – but there is a range of long-term targets chosen in order to achieve that.  Some, especially smaller schemes, will target buy-out in the longer term while the majority of larger schemes will target self-sufficiency.  Even within that phrase ‘self-sufficiency’ there is a very wide range of definitions.

Working hard

We have to give credit to the enormous amount of hard work done by the cyclists and all involved in supporting them.  And we have to recognise there is a lot of work to do to solve pension deficits, and that it will not get the same recognition as an Olympic cyclist.  But for our pension plan members it is probably even more important that we keep working hard at capturing those marginal gains.

About the author

This article was written Lynda Whitney, a partner in the retirement practice at Aon Hewitt’s derisking team. For more information, please contact Aon Hewitt on 0800 279 5588 or email enquiries@aonhewitt.com


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