What is pension risk management and why is it important to look at the health of your pension?

Pension risk management is the process of identifying, analysing and managing risks associated with pension plans. It’s an incredibly important part of pension planning. After all, should things go awry, you may find your pension lacking for your lifestyle post-retirement.

Continue reading for more information about pension risk management.

Pension risk management explained

Most defined contribution pension schemes put your money into investments, in order to protect it from the effects of inflation. In an ideal world, your pension investments would beat inflation to give you a more valuable pension pot in real terms.

But, just like investing in stocks and shares, pension investment carries risk, the biggest being that the fund could fall in value significantly.

So, choosing a safer fund and accepting lower returns may make sense, but this ignores two additional risks:

  • returns may not keep pace with inflation (while the value will increase, real returns are negative)
  • the fund may not perform well enough to keep pace with the cost of providing pension benefits (annual management charge, policy fees, trading fees, etc.)

Meanwhile, there’s the risk of you underfunding your pension, which could seriously harm your plans even after taking returns into account. There’s the chance of you living far longer than expected, only to find yourself without the funds you need.

Then, there are risks associated with interest rates — at its most basic, lower interest rates may lower your returns, forcing you to put away more money each month to hit your target; higher rates would have the opposite effect.

All that is why pension risk management is so important.

Pension risk management strategies

There are multiple strategies you can use to mitigate risk in your pension planning.

  1. Diversify your investments. Spreading your investments across different classes of assets, such as stocks, bonds and real estate, can help spread your risk and reduce the impact of one class performing poorly.
  2. Monitor your investments. Keep a watchful eye over your pension fund’s performance and make adjustments if necessary.
  3. Choose your pension fund carefully. Look for a pension fund with a record of strong performance and a solid investment strategy. Make sure the fund is well-diversified and managed by professionals.
  4. Keep contributing. Even during a downturn, it’s a good idea to regularly contribute to your pension fund to smooth out losses. That way, you minimise the risk of underfunding and a smaller-than-desired-pension pot.
  5. Don’t panic. Generally speaking, small drops in value are nothing to worry about when investing in the long term. So, if your pension pot isn’t doing too well, leaving it alone and waiting can be a good course of action — if the correct risk analysis has been performed.

Pension risk consultants and how they can help

By far, the best way to protect your pension from turbulence is to seek the help of a pension risk consultant who can help you every step of the way.

We’re pension risk consultants ourselves, heavily involved in pension risk management.

Using our experience in the field, we’ll help you identify and confirm potential risks that could pose a problem for you. We’ll then develop a strategy that mitigates risks to deliver you the best possible pension pot for your retirement. We can also provide ongoing monitoring and support to check whether your plan is still working.

Above all, we’ll always work with you — not dictate to you — to ensure your plan works for you. Whether that means helping you identify environmentally-friendly or halal investing or something else, we’ll help you achieve your goals.

Contact us today to discuss how we can help you with pension risk management.

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