The Pensions Challenge - the Treasurer's Balancing Act

The Treasurer magazine is delighted to be working again with The Royal Bank of Scotland to produce a series of expert articles focusing on a topic of particular interest to treasurers. In this case, the focus is on pensions, where there is a balance to be struck between the needs of the company sponsor and those of the pension fund trustees.

 We are delighted to again partner with the ACT in production of The Treasurers Challenge Series 2007. For many companies and their employees pensions are a very real concern. Through the Treasurers Challenge Series we will share our extensive experience in helping organisations navigate their way through the pensions landscape. We hope you find the series informative and of value. Andrew Walker, Managing Director, Head of Financing & Risk Solutions, Sector Corporate Finance, The Royal Bank of Scotland

Andrew Walker, Managing Director, Head of Financing & Risk Solutions, Sector Corporate Finance, The Royal Bank of Scotland

  • In the first of the series, Sinead Leahy, Eddie Doyle and Guy Whitby-Smith of the Pension Solutions Group, RBS Global Banking & Markets consider the importance of establishing a risk framework.
  • In the second article, Paul Greenwood, Marcus Mollan and Andrew Walker of RBS consider how to translate objectives coherently into an appropriate asset allocation strategy.
  • In the third article in this series, Ian Cooper, Sian Hurrell and Guy Whitby-Smith of RBS look at some of the key liability hedging solutions for pension schemes and consider some implementation issues.
  • In the fourth article in this series, Paul Greenwood, Marcus Mollan and Udit Kapoor of RBS consider some of the alternative investment solutions available for diversification and efficient portfolio management, together with some of the challenges associated with credit mandates.
  • In the final article from the series, Peter Williams covers The Treasurer’s Roundtable on Pensions which examines the current state of the pension debate, reflecting on the issues raised in the previous articles. Attending the Roundtable were Dr. Reg Hinkley, BP Pensions Trustees, Paul Wilkinson, Tomkins, Jonathan Clarke, RHM, David Swann, BAT, Kerrigan Proctor, L&G, Stephen Woodcock, Mercer Consulting and Marcus Mollan of RBS.

Additional Pensions information

A balancing act (TT JanFeb07 p20-22)

The pension risk that companies run can often be many times bigger than the foreign exchange and interest rate risks that treasurers have been managing in a systematic way for years. Treasurers need to manage this pension risk in a similar way. However, as ultimate decision making regarding pension investment lies with trustees, treasurers need to balance the needs of the company sponsor with those of the trustees.

Calculated risk taking (TT Mar07 p16-17)

Sensible pension scheme risk management does not necessarily mean selling equities and buying bonds. Rather it is about the trustees and sponsor agreeing an acceptable risk budget and then generating maximum returns within that budget.

Hedging solutions (TT Apr07 p16-17)

In the third article in this series, Ian Cooper, Sian Hurrell and Guy Whitby-Smith of the Pension Solutions Group, RBS Global Banking & Markets, look at some of the key liability hedging solutions for pension schemes and consider some implementation issues.

While the concept of liability hedging is now widely accepted as a key part of any asset liability study, implementation is still surrounded by hearsay and uncertainty. This should not be the case: a coherent implementation strategy for liability hedging can be both transparent and straightforward.

Broader horizons (TT May07 p18-19)

UK pension schemes still take the vast majority of their rewarded risk in the equity markets. Diversifying into alternative assets and use of structured solutions is a way of reducing risk without necessarily reducing expected returns. Other mainstream sources of return such as credit risk are currently being underexploited.

Reward for your risk (TT Jun07 p20-24)

The roundtable reflected on the issues raised in previous articles in the series looking at the importance of developing a risk framework; translating objectives into an appropriate asset allocation strategy – including agreeing a risk budget and managing unrewarded risks; trustee decision-making powers and the use of benchmarks.

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