Our holistic approach to risk management: a case study

Key challenges

In moving from a consulting model to a fiduciary model, the client wanted to better manage the investment risks they were exposed to, particularly from an implementation standpoint. We therefore built a bespoke portfolio reflecting the client’s specific investment beliefs and objectives, with a focus on equities and long-term income generation to help meet pension benefit payments. Going beyond standard models like VaR allowed us to build a comprehensive picture of the risks faced by the scheme in aggregate.

This, in turn, helped the client in their interactions with The Pensions Regulator. Asked to explain their unconventional investment strategy—an approach that saw the scheme invest almost entirely in equities, with no hedging—our analysis proved invaluable. Partnering with SEI gave the client the means to justify the risk/return assumptions they were working to.    

Progress

In the years that followed, a more holistic approach to risk management has given the client a competitive advantage.

Taking a long-term approach has meant short-term volatility has been less of a focus for the scheme’s trustees—they have instead been able to target higher investment returns, lessening the burden otherwise placed on their sponsors. Through rigorous stress testing, we have also ensured the scheme is sufficiently liquid, such that the trustees can continue meeting benefit payments with confidence.

But perhaps the greatest achievement for this client is around the scheme’s journey to buyout—where this milestone was once a distant ten years away, it now looks achievable in as little as 2-3 years. This is thanks to rising interest rates over the course of 2020 and the scheme’s advantageous position heading into 2022’s liability-driven investment (LDI) crisis (‘advantageous’ insofar as the scheme had no leverage and an appetite to increase hedging).

A more holistic approach to risk management has helped this client achieve:

Source: SEI

1. Annual returns provided from June 1995 to 31 October 2022.

2. As at 28 February 2023.

Next steps

After a successful 2022, our focus now is on protecting the client’s funding position. We are carefully evaluating and refining the scheme’s implementation and cash flow match whilst reviewing the way we report.  

Important Information

This is a Marketing Communication. This webpage contains marketing material about our fiduciary management service. This webpage does not represent impartial advice on this service. In certain cases, you are required to conduct a competitive tender process prior to appointing a fiduciary manager. Guidance on running a tender process is available from the Pensions Regulator.

This case study describes the attributes of a specific client that SEI has determined is comparable based on objective criteria, including organisational goals, asset size and industry sector. Any discussion of specific asset allocations is intended to help clients understand SEI’s customised investment approach, and should not be regarded as a recommendation. Information concerning SEI’s recommendations over the last year is available on request. The information expressed herein represents the current, good faith views of SEI at the time of original publication, and has not been updated.

This webpage is provided by SEI Investments (Europe) Ltd ("SIEL"). SIEL is authorised and regulated by the Financial Conduct Authority. Financial Services Register Firm Reference Number (FRN) 191713. Registered office; 1st Floor, Alphabeta, 14-18 Finsbury Square, London EC2A 1BR. Registered in England and Wales – company number 03765319. This webpage is intended for Institutional Investors only and should not be distributed further. While considerable care has been taken to ensure the information contained within this paper is accurate and up-to date and complies with relevant legislation and regulations, no warranty is given and no representation is made, as to the accuracy or completeness of any information and no liability is accepted for any errors or omissions in such information or any action taken on the basis of this information. The views and opinions in this webpage are of SEI only and are subject to change. They should not be construed as investment advice. Sustainability guidelines may cause a manager to make or avoid certain investment decisions when it may be disadvantageous to do so. This means that these investments may underperform other similar investments that do not consider sustainability guidelines when making investment decisions. There can be no assurance goals will be met. If a product or strategy is subject to certain sustainable investment criteria it may avoid purchasing certain securities when it is otherwise economically advantageous to purchase those securities, or may sell certain securities when it is otherwise economically advantageous to hold those securities. Sustainability is not uniformly defined and scores and ratings may vary across providers.