If the same drivers were observed but in the opposite direction, particularly with rising interest rates, the outcome would have been correspondingly different. U.S. plans would have most likely outperformed their U.K. counterparts during the period, assuming equity markets in the U.S. continued to outperform equity markets in the U.K.. Nevertheless, even when markets dropped by more than 20% in recent weeks, they tended to drop simultaneously across the two regions due to positive correlations, on average. U.S. and U.K. retirees, however, must be protected regardless of what happens to equity markets, implied asset classes correlations or interest rates. Although volatility and asset allocation during the journey of a pension plan matter, asset allocation combined with the right level of hedging matters most of all.
Forward-thinking pension plans test their strategy against multiple alternatives in several markets using both stochastic modeling and scenario analysis. Doing so helps uncover the optimal balance of risk and return that suits both the jurisdiction and the plan sponsor's business environment.
Asset allocation strategies will always vary; the challenge is to determine the right strategy in the long run.
Christian Hristov is product owner at RiskFirst, a Moody's Analytics company, London. This content represents the views of the author. It was submitted and edited under Pensions & Investments guidelines, but is not a product of P&I's editorial team.