IN BRIEF

J.P. Morgan Asset Management partners with a range of pension schemes to solve today's investment challenges. We recently created a tailor-made global multi-asset portfolio for a defined benefit pension scheme seeking to de-risk while servicing material cash-flows. Our recommendation based on the client's circumstances was to transition from a fund-focused strategy to a bespoke liability-aware multi–asset mandate incorporating a liability matching fixed income sleeve.

Client profile

A German client with a mature defined benefit pension scheme looking to move away from an aggregate bond portfolio towards a holistic pension solution. The client’s primary objective was to de-risk the portfolio while ensuring the scheme’s assets were sufficiently cashflow-generative in order to meet pension payments. The client also needed to build an expected capital reserve in order to hedge against inflation and demographic risks.

Investment challenge

The client has a well-funded pension scheme, with a funding status between 110% and 120%, but there was a large duration mismatch between the scheme’s assets (4.5 years) and its liabilities (12.5 years). The result was a significant propensity for the scheme’s funding status to decline.

To alleviate balance sheet risk, the client was looking for a holistic solution that better aligned scheme assets with liabilities. The scheme must service pension payments of 3%-4% of assets per annum, and also needs to ensure that assets are invested in a cashflow generative manner to avoid becoming a forced seller of assets while building a reserve against demographic and inflation risks.

The solution

Our recommendation to this particular client was to invest the scheme’s assets through a combination of equity funds and a liability-tailored buy-and-maintain fixed income sleeve. The buy-and-maintain portfolio was designed to provide a much closer liability hedge, resulting in a vast reduction of the previous duration mismatch. The scheme’s assets were chosen to ensure that they can meet pension payments due over the next decade.

The scheme is now better hedged against interest rate movements, while its investments generate a sufficient yield to reduce the risk that the scheme will become a forced seller of assets.

 

 

Liability Profile

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Source: J.P. Morgan Asset Management. For illustrative purposes only.

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