UK pension funds – behind the curve
A fascinating graphic from Goldman Sachs Asset Management’s new UK pension report.
It shows how much FTSE 350 UK pension schemes allocate to fixed income assets compared to their funding levels – and what it reveals offers a troubling insight into the management of UK schemes.
As funding levels rise, the general idea behind pension scheme investment is to lock in the rises by de-risking – selling out of riskier equities and buying fixed income assets like gilts, which offer a better match for paying employee pensions.
Last year was good for pension funding levels. This graph shows that funding levels rose from 93 per cent to 103 per cent, meaning that on average pension funds had more than enough cash to cover the cost of paying pensions to its members.
As you can see, the majority of the funding rise came from the rally in public equity markets last year (realised investment returns), which added 9.5 per cent.
So we can assume that – as funding levels improved – so too would the allocation to fixed income. But look closer again at the first graph, and the blue line, which represents a generic investment plan.
Most smaller pension schemes (under £500m in size) are failing to move their assets into fixed income, even as their funding levels rise.
There is even one scheme which is 120 per cent funded and yet holds zero fixed income assets.
Part of the reason for this could be may be that most pension schemes de-risk their pension schemes based on yield-based triggers, rather than funding level triggers (a strategy, it should be said, that Goldman does not employ).
But the problem may be more the size of a pension fund itself. Funds over £1bn in size are closer to the blue line, and de-risking more as their funding levels improve.
Big schemes, of course, have more resources to take the time and effort to de-risk when markets swing in their favour.
But the lack of de-risking from pension schemes of all stripes should make shareholders sit up and take notice – it is them, of course, who are being forced to back schemes when their funding levels hit the buffers.