Then there is recourse to rate-of-return guarantees provided by third parties (an insurance company, the sponsor or a central reserve fund). A DC pension fund may also maintain a reserve to smooth returns over time: in good investment years part of the fund’s returns are placed in the reserve, which can be drawn on when they fall below a certain threshold.
While financial markets offer different ways of introducing minimum return guarantees, it is clear that the hedging of financial market risks does not come without cost. A higher incidence of fixed-income instruments may take its toll on portfolio returns; the use of derivatives or third-parties guarantees implies the payment of fees.