De Risking Insured Db Plans Fin
- 1. De-risking DB plans using pooled funds Keeping it simple
- 2. Existing funding level volatility is too painful Source: IS estimates. Actual funding level based on actual market movements. Expected funding level based on actuarial valuation assumptions.
- 3. De-risking is simple in theory Risk relative to liabilities Return Efficient frontier Traditional 50/50 equity/bonds Remove liability volatility Diversify Potential 25% risk saving Potential 25% risk saving Source: IS estimates based on house assumptions. Slide for illustration purposes only.
- 4. So are the benefits of LDI matching funds Charts are for illustration purposes only. Start position 50 100 50 0 20 40 60 80 100 120 Assets Liabilities Gilts Equities Start position 50 100 50 0 20 40 60 80 100 120 Assets Liabilities LDI funds Equities Yields go down 1% 55 120 50 0 Assets Liabilities Gilts Equities Yields go down 1% 70 120 50 0 50 100 150 Assets Liabilities LDI funds Equities 0 50 100 150
- 5. But trustees have problems with timing the “lock-in” 2 months 6 weeks
- 6. Equity like returns can be delivered with considerably lower risk Diversified Growth Funds (“DGFs”) allow investors to target a similar level of investment return as that targeted by equity funds, but with a significantly lower level of risk. Expected risk and return based on Investment Solutions long-term assumptions. In practice actual returns may differ from expected returns. The Chart contents are for illustrative purposes only and are not in any way a recommendation. Investment Solutions cannot give advice and can only provide information on its own products and services. Source: Investment Solutions DGF UK Equity UK Gilts Standard Balanced (65:35) 0% 2% 4% 6% 8% 10% 0% 5% 10% 15% 20% Expected Risk (Std Deviation) Expected Nominal Return
- 7. But trustees need specialist advisers who understand DGFs and have the confidence to recommend them Operational Risk Business sustainability Liquidity – Daily Liquidity required Regulatory / security of assets Diversified Counterparty exposure in underlying products Investment Risk Ensure that we are compensated for any risk taken, positively skewed Sizing of positions – Ensure diversification between all asset classes No unintended positions in place e.g. currency exposure Source: Investment Solutions
- 8. We recommend a simple advisory model
- 10. Disclaimer Investment Solutions Limited is authorised and regulated by the Financial Services Authority. Registered in England and Wales. Registered Number: 3104978. Investment Solutions Fund Managers Limited is authorised and regulated by the Financial Services Authority. Registered in England and Wales. Registered Number: 842763. Registered Office: 6 Bevis Marks, London, EC3A 7AF. Financial Services Authority registered address: 25 The North Colonnade, Canary Wharf, London E14 5HS. Past performance should not be seen as a guide to future performance and may not be repeated. The value of investments may go down as well as up and investors may not get back the amount originally invested, are not certain to make a profit and may lose money. Performance is quoted using close of business valuations and may differ from statement values, which use dealing valuations. Exchange rate changes may cause the value of overseas investments to rise or fall. Investment in emerging markets is high risk in nature and should be seen as a long term investment. Investment in property may not be readily realisable. The value of property is generally a matter of valuer’s opinion rather than fact. Investment managers and/or weightings may be varied at the discretion of Investment Solutions. This presentation does not constitute investment advice nor a recommendation to purchase any security. The information in this presentation is proprietary to Investment Solutions Limited. No part of this presentation may be reproduced or transmitted in any form without permission in writing from Investment Solutions Limited.