J.P. Morgan Asset Management warns in a new (study/paper) it released today that pension schemes might be subject to other significant risks in addition to those posed by volatility in their assets and liabilities.
The paper, The Missing Link, explains how structural links can exist between pension scheme investments and the economic exposures to which their sponsors are exposed. It highlights that this significant risk is often overlooked and proposes not only an approach to measuring this risk but ways in which the risk can be managed.
The paper emphasises that in the current economic environment it is essential for pension schemes to consider the impact of their sponsor becoming insolvent or being unable to contribute to help match liabilities.
Paul Sweeting, European Head of the Strategy Group at J.P. Morgan Asset Management cited the following example, "If a sponsoring company is heavily reliant on the price of oil, for example, it is essential that the company's defined benefit pension mitigates the effects of fluctuating oil prices in their investment portfolio. If not taken into consideration, a significant change in oil prices could have a substantial impact on the sponsor's balance sheet as well as increasing the potential shortfall in pension scheme assets."
Sweeting went on to say, "Trustees are increasingly aware of the range of risks present in defined benefit pension schemes and many sponsors are aware that the call for additional contributions from a pension scheme often comes at the wrong time. The Missing Link brings these views together to highlight the links between the two groups and the need to consider all types of risks, particularly in challenging economic conditions."
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