Strategies for Managing Defined Benefit Pension Scheme Funding and Risk

As a business leader or CFO, overseeing your DB pension scheme’s funding and risk is a critical aspect of securing the financial health of your organisation.

With growing economic uncertainty and the pressure of fulfilling pension obligations, the challenge of striking the right balance between maintaining a competitive scheme and controlling costs can feel overwhelming.

However, by adopting strategic measures, you can mitigate potential risks while safeguarding the future of your employees’ retirement savings.

Diversify investments

A key component in optimising pension scheme funding is ensuring a diversified investment strategy. The importance of diversification cannot be overstated. By spreading investments across a range of assets – such as equities, bonds, property and alternative investments – you reduce the risk of a significant downturn in one market impacting the entire fund.

This balanced approach allows you to adapt to fluctuating market conditions, providing a smoother long-term performance.

Manage liabilities

Handling pension liabilities is just as crucial as handling assets. For example, expenses can be significant in defined benefit schemes and, as such, you must be proactive in removing them. It’s well worth looking for ways to transfer your pension risk, especially as schemes approach maturity.

One option to explore is de-risking strategies, which involve transferring the risks of liabilities partially or fully to an insurer. By doing so, you reduce the volatility and uncertainty surrounding your scheme’s financial outlook, offering more security for both your employees and your business.

Conduct regular audits

Regular audits are vital in optimising scheme funding and ensuring compliance with regulations, like the Pensions Regulator: General Code of Practice. Auditing can help you understand whether the scheme’s finances are in order and whether it meets its targets. They also give you a clearer picture of the risks your scheme faces, which can inform strategic decisions moving forward.

Audits should not only focus on financial health but also assess the overall governance of the scheme. Ensuring that the scheme operates efficiently and effectively will help keep you ahead of potential issues before they become larger problems.

Securing long-term financial stability

By implementing the tactics outlined above, you can safeguard your pension scheme against unpredictable risks. Ultimately, taking a strategic and balanced approach to overseeing your scheme will protect both your business and your employees, creating a stable foundation for the future.