Failure to diversify increased deficits by £10bn
UK - The combined deficit of the UK's 200 largest pension funds increased to £12bn (€16bn) in January, as schemes failed to diversify into other growth assets, Aon Consulting has revealed.
Figures from the Aon200 Index, which tracks the surplus or deficit of the top 200 private pension schemes, revealed that in January pension schemes experienced volatility equivalent to daily swings of more than £10bn, the highest recorded level since 2001.
As a result, Aon figures showed just 40% of schemes are now in surplus, as the combined deficit increased from £2bn at the end of December to £12bn at the end of January.
But the firm claimed as the main cause of volatility was high levels of equity investment during a turbulent time for the stock markets, schemes would have performed "significantly better" if they had switched from equities into diversified growth funds.
Findings from the index claimed schemes could have halved the average daily swings and ended the month £6bn in surplus, rather than £12bn in deficit, if they had been investing as diversified growth funds, which aim for similar long-term return as equities but with less volatility.
However, Aon confirmed many schemes covered by the research had neglected the opportunity to diversify their portfolio and implement the investment strategy.
Marcus Hurd, senior consultant and actuary at Aon, said while pension schemes are long-term investors, many cannot afford to ignore short-term pressures, which can affect business plans and destroy confidence.
"Diversified growth is an opportunity neglected by many pension schemes. Many companies and trustees accept that equity investment is volatile in the quest for higher returns in the long run. The opportunity to seek similar returns with lower volatility, however, should not be ignored."
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