Pension funds run “economic” risk of sponsors

Pensioner-with-caneWhat else could be bad for pension funds as well as the current reign of volatility playing havoc with their assets and liabilities? According to JP Morgan Asset Management (JPMAM) it is the link between a pension fund’s investments and the economic exposures of its sponsoring company. For example, if a sponsoring company is heavily reliant on the price of oil, it is essential that the company’s defined benefit pension mitigates the effects of fluctuating oil prices in their investment portfolio, says Paul Sweeting, European head of strategy group at JPMAM. 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, who has produced a paper called The Missing Link that looks at other significant risks in addition to those posed by volatility, says 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. ©2012 funds europe

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