MEETING THE CASH FLOWS
The liabilities of the pension scheme are its' future cash flows and the investment strategy should be set to meet them. In too many cases we see investment strategy driven by the method the actuary has adopted to place a value on those cash flows. This is definitely a case of the tail wagging the dog.
Investing for a pension scheme isn't that different to how we invest as individuals.
If you have short term needs that aren't covered by your income you keep money on deposit and in the bank. Medium term needs will be covered by having some lower risk investments that aren't expected to lose value but are expected to provide a higher return. Longer term savings focus on having a wider diversified range of investments chosen to provide longer term capital growth and to provide protection from the impact of future inflation. You might then consider what would happen if you were suddenly ill and unable to work again and you might modify your investment approach if you thought you were taking too much risk given your particular circumstances.
Our approach to investment advice can, in some cases, be relatively pragmatic and simple. There is a significant amount of investment advice that looks scientific but is built on some major fundamental assumptions that have proven again and again to be incorrect. Based on past experience we can calculate an optimum strategy for a given level of risk. The difficulty comes in deciding how much past experience to allow for (5 years, 10 years, 30 years?) and how to allow for those "once in a million" events that we seem to be experiencing relatively frequently. The answer is diversification but specifying narrow ranges for each asset class is adding a level of sophistication and precision that experience doesn't support.