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Delegated Solutions United Kingdom

Mercer Dynamic De-risking Solution

Mercer helps trustees by:
 
  • Agreeing the funding objectives and de-risking strategy to manage the DB pension scheme along a path to full funding
  • Developing and implementing the strategy through daily monitoring of the funding level and asset values
  • Providing an innovative governance framework to realise investment gains and limit potential losses from market fluctuations using a rules-based approach

THE CHALLENGES

Defined benefit (DB) pension schemes have been affected by:

  • Unprecedented volatility in funding levels
  • Equity market declines
  • Low real bond yields
  • Dramatic longevity improvement  

 

LIMITED RESOURCES

Most trustee boards have limited resources with which to handle the challenges that their schemes face. Boards might only be able to meet a handful of times a year to apply what resources they have.

As a result, schemes can miss valuable opportunities to lock-in improved funding ratios during the good times. And they might be unable to manage downside risks during periods of market adversity.

THE CHOICES

Risk management solutions include a commitment to selling growth assets gradually and using liability-driven investing, protective equity options, enhanced transfer value programmes, longevity swaps, pension buy-ins and full scheme buyouts.

We believe that no single tool is a panacea. The suitability of each strategy should be monitored continuously in light of prevailing market opportunities.

THE SOLUTION

Mercer Dynamic De-risking Solution (MDDS) is designed to bring order, discipline and new operational capabilities to DB fund management. It can transform the way in which schemes develop and manage their risk reduction plans.

Mercer is uniquely positioned to provide scheme sponsors and trustees with a real and practical solution to their pension funding challenges. 

 

MDDS brings together Mercer’s renowned retirement and investment consulting experience with its established and highly successful implementation capability.

HOW MDDS WORKS

Mercer works closely with trustees and sponsors to agree the overall funding objectives, and to calibrate an affordable de-risking path.

The following steps are taken:

  1. Long-term funding target is established
  2. Time horizon and risk appetite are specified
  3. Based on this, Mercer calculates the expected funding path and recommends a series of funding level bands crossed by this trajectory
  4. Each band has an associated target growth allocation
  5. The funding level is monitored daily by Mercer and is reported via secure web access
  6. If the funding level crosses upwards into a new band, this automatically triggers a reduction in the growth portfolio allocation in line with the predetermined de-risking schedule and a corresponding increase in the matching portfolio allocation.
  7. If the funding level falls to the downside protection level, this also triggers automatic actions by Mercer:
  • To implement downside protection to reduce further losses
    • To maintain protection until funding level rises back into the previous band

The following chart illustrates how this works:

 

 

 

Issued in the United Kingdom by Mercer Limited which is authorised and regulated by the Financial Conduct Authority. Registered in England No. 984275. Registered Office: 1 Tower Place West, Tower Place, London, EC3R 5BU.

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