Does Low Risk Always Mean 'Low Return'?

In this article, we explore the importance of integrating funding-related risks into decision-making when managing a low-risk defined benefit pension scheme.

What are funding-related risks?

There are a wide variety of estimates and practical realities, which mean there is inherent uncertainty in the size and shape of a scheme's liabilities.

These are funding-related risks, and examples include:

• Longevity risk: Scheme members live longer than expected.
• Inflation basis risk: The inflation hedge employed does not match actual increases awarded.
• Member option risk: Members' choices and option terms may vary from those assumed.
• Data risk: The data used is wrong or incomplete.