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Dynamic de-risking for stronger investing

One of our investment consultants, Scott Edmunds, explains how Quantum dynamic de-risking strategies could help your investments flex and adapt to market changes.

With deficits featuring prominently on companies’ balance sheets, pension cost management has never been more critical for businesses and trustees alike.

A dynamic de-risking strategy focuses on the ultimate goal of self-sufficiency or buy-out; it provides a framework for taking action in response to favourable financial market conditions as and when they arise.

There are three main pillars to Quantum’s dynamic de-risking solutions:

  • Trigger based bond investment
  • Trigger based interest rate hedging
  • A qualitative overlay

Trigger based bond investment

This mechanism automatically switches monies from return seeking assets to assets which exhibit liability matching characteristics. It does this by “locking in gains” when a scheme’s funding level has risen above target, due to favourable experience in the past.

This “profit taking” process involves:

  • Determining the client’s goals, risk tolerance and time horizon.
  • Mapping out the assumed development of the scheme’s funding level over time (the “flight-path”).
  • Tracking the actual funding level and automatically switching “excess” assets from return seeking to liability matching assets as and when the funding level exceeds the flight-path by a prescribed minimum.

Trigger based interest rate hedging

This is a technique for automatically adding protection against the effects of interest rate falls. (Remember: as rates fall the value of liabilities rises).

The trigger is fired as interest rates rise or as the funding level improves to prescribed levels. The premise is simple:

(i) as interest rates rise, the likelihood of them falling again increases, as does the desire for protection;

(ii) as the funding level rises, the desire to hedge against interest rates and the funding level falling again increases, regardless of the current level of rates.

The process involves:

  • Determining the clients’ goals, risk tolerance and time horizon.
  • Agreeing pre-determined funding level and interest rate triggers.
  • Tracking the funding level and the level of interest rates.
  • Implementing additional hedges as and when the funding level and/or interest rate triggers are hit.

Qualitative overlay

At regular intervals, Quantum Advisory and our clients consider whether the investment strategy should be varied in light of:

(i) funding-level progress to date; and/or

(ii) changes in the outlook for the various asset classes.