In this example, fund members would allocate assets to a bond portfolio that is designed to provide a steady yield over the desired time period. Some of the yield would then be used to purchase call options that provide exposure to stock market returns. The degree of exposure would vary based on the option costs as well as the budget provided for their purchase. Managing risk: Alternatively, derivatives may be used explicitly to hedge risk. The variety of instruments and methods available gives funds flexibility in structuring solutions that fit with their approach—for example, option budgets, put options, and futures. In principle, each of these strategies should yield similar outcomes, but in practice they may produce different results depending on the legislative and tax environment within which the investment is structured. Insurance/outsourcing counterparties Various outsourcing counterparties are available depending on the nature of the risks a fund is looking to protect.

Ultimately, institutions such as insurance companies or investment banks provide a “wrapper” for the provision of products using various asset allocation strategies. For example, a fixed annuity provides access to fixed income assets whilst variable annuities provide access to equity, fixed income investments, and derivatives within an insurance context. The attractiveness of these structures is that the insurance company can provide investors with a guarantee supported by its balance sheet and capital. When dealing with counterparties, the exposure must be managed and there must be is sufficient flexibility to alter a fund’s arrangements over time without creating legacy issues. This, together with portability, has been a major concern of fund trustees globally, and perhaps explains the relative lack of third-party insurance solutions within DC pension schemes. New approaches may help overcome these issues.

The value proposition – what risks? Fundamental to each strategy is the need to address underlying member issues. As the focus has shifted from the management of returns to the management of risk, so too have approaches moved away from a pooled or “one size fits all” model to strategies that are customised at an individual level. This shift of approach reflects the need for flexibility and the increasing competition between different sectors of the retirement savings market, which results in a blurring of the line between occupational pensions and retail wealth-management models. Types of risk: market risk has dominated recent debate, but various issues can affect the sustainability of an individual’s retirement savings, including: • Longevity: investors might outlive their assets • Market: negative investment returns diminish savings • Inflation: higher-thananticipated inflation erodes savings faster than expected • Health: higher-thanexpected healthcare expenses • Behavioral: poor planning or investment can result in inadequate retirement assets Whatever approach is adopted, cost will play an important part in the ability to create an attractive proposition and the ultimate outcome. Any calculation of costs needs to take into account: market cost of protection, distribution costs, administration costs, profit for third parties, opportunity cost, transparency.