Covenant risk - modelling, managing and mitigating a key risk

Moving schemes towards better glidepaths.

As part of LGIM’s focus on Liability Aware Investing we have been urging our clients:

1. to manage their scheme risk in a holistic way; and
2. to become increasingly outcome orientated in their decision making.

This means that “paying all pensions as they fall due” should increasingly be the primary driver of all scheme decision making. In practice, we believe this means trying not to be overly distracted by short-term moves in markets.

Our view of success for pension schemes is “the assets outlasting the liability cashflows”. This is not a definition many would disagree with, and almost all of our clients are aspiring to some well-funded measure over time – usually buyout or a flavour of self-sufficiency. However, schemes face many hurdles along the way to achieving their aspirational targets.