Managing any investment portfolio is all about making the right decision at the right time. Sometimes those decisions are expected to pay off over short time horizons. With these, it is easier to observe, review and alter course. Sometimes, those decisions are rewarded or otherwise over much longer periods.
In the world of DB pension investment strategies, the long term nature of some of the decisions can be compounded by inheriting other people's decisions. New trustees and finance directors inevitably inherent the decisions of their predecessors.
Many trustees and finance directors are today grappling with the challenge resulted from the unhedged interest rate and inflation exposure of their liabilities. With the benefit of hindsight, they should have closed those risks out many years ago.
Unfortunately time travel is not an option. Bemoaning a decision not to hedge (or more likely no decision to hedge) in the past is unhelpful today. Similarly pointing to the benefit that a hedge would have had doesn't help. You can't buy past performance and you can't extrapolate the past into the future either.
I was asked recently whether now was a good time to start a LDI programme given the low level of interest rates. I replied, “absolutely”. We all know rates are low and the market expects them to increase (somewhat, at some time) but they are likely to stay low for some time. There are risks that rates could fall further hitting pension scheme solvency further.
Now it may be that the hedge is introduced progressively and opportunistically, but the strategy needs to be considered and the plan developed in advance. The interest rate and inflation sensitivity of the liabilties is often the biggest single risk for a scheme. Even if you are really, really confident that rates are going to rise by more than the market is pricing in, do you want to continue to bet the farm?