Setting investment strategy

Setting investment strategy is the most important decision that trustees make. In doing so, they are required by legislation to consult with the sponsoring employer. Our advice is focused on helping our clients understand the risk and rewards of potential strategies to arrive at the right mix of asset classes for their scheme's circumstances.

Investment strategy roadmap

We use a straightforward roadmap which follows the four questions:

By navigating you through this roadmap, using interactive tools and clear communication, we will help you understand the "journey risk" - the risk of a significant deficit arising in the next few years, and the "destination risk" - the ultimate probability of meeting the benefit promise.

At the outset we educate clients about the nature of their scheme's future cash flows, and how the associated risks of meeting them can be managed. We will ensure that you understand your options and will give you a direct recommendation on the direction we think you should take.

Alternative asset classes

Alternative asset classes include:

• Diversified growth funds
• Commodities
• Infrastructure
• Active currency management
• Hedge funds

Diversifying into other asset classes like these can help make the investment strategy more efficient. It allows schemes to increase their expected returns for the same level of risk, or reduce risk without sacrificing expected returns.

We work with our clients to give them a much greater understanding of these unfamiliar assets. We provide an objective opinion of the benefits and drawbacks. This includes timely advice on relative attractiveness and appropriate levels of investment.

Our LCP JAZZ tool allows trustees and sponsors to see hands-on how diversification can help their scheme. This enables them to confidently make informed decisions.

Liability driven investment

Liability Driven Investment ("LDI") is potentially useful in a range of circumstances. Its key attraction is that it has the potential to narrow the range of future investment outcomes. However, reducing the risk comes at a price: that of reducing potential returns. Using LDI makes assets and liabilities track each other more closely over time. It does this by matching the future cash coming from bonds with the future cash needed by the pension scheme. It also reduces volatility.

Scheme's expected cash flows (dark purple bars) show differing levels as membership falls.

Long dated government bonds show a mismatch between the scheme's cash flows (light purple line) and bond payouts (dark purple bars).

A well designed LDI solution should aim to be practical and to help match a scheme's cash flows, so that any investment solution and the expected cash flows move in tandem.