JPMorgan Asset Management launches guide to risk for trustees

As DC schemes look set to face another year of rapid growth in the midst of uncertain markets; JPMorgan Asset Management (JPMAM) has issued the latest in its DC Insights series, which identifies six key steps to understanding risk. Aimed at trustees, it addresses the key issues for consideration when supporting members in their investment choices and looks at how exposure to too little risk can be as dangerous for a portfolio as too much.

Currently two thirds of all pension schemes included in the recent survey from Hewitt Consulting*, offer only DC as the sole provision of pension saving, making DC schemes the pension scheme of choice for employees. JP Morgan argues that this puts fresh responsibility on Sponsors and Trustees to ensure that their DC provisions are up to date with the latest investment developments. In particular, they need to acknowledge their members need to take appropriate risk with their capital to ensure they build up sufficient funds for retirement.

Six things you should know about risk is designed to help trustees understand the advantages offered by DC pension schemes, which include investment options that allow risk to be diversified and managed more effectively than ever before.

Commenting on the launch of the guide, Simon Chinnery, Client Advisor, UK Institutional Business for JPMorgan Asset Management, said: “With the rise of DC schemes, trustees are expected to understand more than ever the workings of the investment markets. This guide takes them through the ‘risk maze’, addressing issues such as ideal levels of risk, how to diversify risk across different asset classes and what types of investment products are suitable.

The guide discusses the following areas of risk:

1. Risk can be relative or absolute

Helping ascertain the level of risk involved whether it be the ‘absolute’ risk of losing money or the relative risk of performing worse than a particular benchmark.

2. Risk and reward no longer need to be an equal trade off

New investment approaches meaning the risk-reward trade-off no longer has to be equal, with hedge fund techniques such as shorting and tactical asset allocation enabling fund managers to reduce downside risk without sacrificing upside potential.

3. Different pensions assets deserve different levels of risk

Focusing on the lowest risk options means members can miss out on greater returns. Matching different levels of risk to different pension assets can help members achieve a better balance.

4. Blending assets is key to reducing risk

Globalization means that stock markets are increasingly correlated, so diversifying into different asset classes helps avoid problems which are increasingly linked.

5. Too little risk is as bad as too much

Historic data shows that anyone who has relied on low-risk investments such as cash deposits and gilts for their savings has severely fallen behind savers who have chosen to invest in equities.

6. Time is the biggest factor when deciding the right level of risk

Even though they are often volatile, investment markets have always tended to rise over time. The amount of risk taken should therefore depend on when a scheme member will need to call on their pension fund as the more time they have the greater the opportunity to ‘ride out’ the falls.

* The Hewitt Consulting 2007 DC Survey, which covers 106 DC Schemes