50% of DB schemes need to focus on long-term risk
UK - Half of all UK defined benefit (DB) pension schemes do not have a long-term strategy for reducing risks, despite 80% acknowledging the need to address de-risking, joint research by Hymans Robertson and PensionChair Network has revealed.
An online survey of 57 respondents, mainly chairs of trustee boards with pension funds of between £2.4bn (€2.75bn) to £70bn, suggested while 70% of respondents took action to reduce investment risks when stockmarkets peaked in 2007, only 45% have plans in place to capture and lock in future upturns.
James Mullins, liability management specialist at Hymans Robertson, said: It is surprising that such a large number of pension schemes do not have long term plans to reduce the risks they are running. This is despite the fact that 80% of pension schemes acknowledge the need for a long term de-risking strategy.”
The Pension Protection Fund’s (PPF) 7800 Index has highlighted the volatility in DB deficits resulting from stockmarket changes, as the funding level moved from a combined surplus of £99bn in June 2007 to a deficit of £242bn in March 2009, which Mullins claimed is a £341bn swing or “equivalent to around 12% of the UK’s GDP”.
He warned: “Unless more pension schemes put in place long term strategies to reduce their risks, we fear in the years to come we will see a repeat of the dramatic increase in deficits that we saw in 2008. Unfortunately many schemes did not learn the lessons of the market falls in 2001-02, but it is crucial they learn the lessons of 2008 by ensuring intelligent opportunities to reduce risk are seized in the future.”
Hymans Robertson warned de-risking should not be carried out on an “ad-hoc” basis and instead suggested a coherent long-term strategy agreed between trustees and the sponsoring employer should cover a range of areas including benefit strategy, liability management, funding and investment strategy.
Russell Chapman, partner and corporate investment consultant at Hymans Robertson, added: “As the UK begins its recovery from recession, with the resulting market shifts, now is an ideal time for pension schemes to review their strategy as part of a wider long term plan to manage risk.”
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