Consultancy firm Mercer is moving into a new area of risk management and control to help pension scheme clients de-risk themselves from falling fund levels, volatility in the market and longevity risks. This article in the FT discusses the ways that Mercer say they are helping schemes including assisting them with investment strategies, particularly around alternatives.
Alternatives often have returns which are extremely attractive to pension schemes, particularly for those where funding levels have dropped and they’re seeking ways to increase funding with the aim of becoming fully funded again. This is also a strategy for combatting longevity risk (the risk of members of a pension scheme living longer and thus claiming for longer) as increasing the funding can minimise the lack of funding required to pay increasingly long living pensioners.
Alternative assets are an area Mercer has been exploring for their pensions clients. In the past year the article says Mercer has been specifically looking at catastrophe bonds as an ‘exotic beta’ approach that it can use for its clients.
Pension funds could become one of the biggest investors in the catastrophe bond asset class over the next year, some large schemes are already investing in the sector and more money is expected to flow in from pension funds over the coming months. If pension funds choose to keep their risks (such as longevity) on their own balance sheets rather than trying to transfer them to an insurer or the capital markets, investing in non-correlated assets with a high return (such as cat bonds) could become a widely used strategy.